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A Model for Counterparty Risk with Geometric Attenuation Effect and the Valuation of CDS

Listed author(s):
  • Yunfen Bai

    (Department of Mathematics, Shanghai Jiaotong University;
    Department of Mathematics, Shijiazhuang College)

  • Xinhua Hu

    (Department of Mathematics, Shanghai Jiaotong University;)

  • Zhongxing Ye

    (Department of Mathematics, Shanghai Jiaotong University;)

Registered author(s):

    In this paper, a geometric function is introduced to reflect the attenuation speed of impact of one firm's default to its partner. If two firms are competitions (copartners), the default intensity of one firm will decrease (increase) abruptly when the other firm defaults. As time goes on, the impact will decrease gradually until extinct. In this model, the joint distribution and marginal distributions of default times are derived by employing the change of measure, so can we value the fair swap premium of a CDS.

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    Paper provided by in its series Papers with number 0706.3331.

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    Date of creation: Jun 2007
    Handle: RePEc:arx:papers:0706.3331
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