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Credit Risky Securities Valuation under a Contagion Model with Interacting Intensities

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  • Anjiao Wang
  • Zhongxing Ye

Abstract

We study a three‐firm contagion model with counterparty risk and apply this model to price defaultable bonds and credit default swap (CDS). This model assumes that default intensities are driven by external common factors as well as other defaults in the system. Using the “total hazard” approach, default times can be generated and the joint density function is obtained. We represent the pricing method of defaultable bonds and obtain the closed‐form pricing formulas. By the approach of “change of measure,” analytical solutions of CDS swap rate (swap premuim) are derived in the continuous time framework and the discrete time framework, respectively.

Suggested Citation

  • Anjiao Wang & Zhongxing Ye, 2011. "Credit Risky Securities Valuation under a Contagion Model with Interacting Intensities," Journal of Applied Mathematics, John Wiley & Sons, vol. 2011(1).
    • Handle: RePEc:wly:jnljam:v:2011:y:2011:i:1:n:158020
    DOI: 10.1155/2011/158020
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    References listed on IDEAS

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