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Counterparty risk valuation for CDS


  • Christophette Blanchet-Scalliet


  • Fr'ed'eric Patras



The valuation of counterparty risk for single name credit derivatives requires the computa- tion of joint distributions of default times of two default-prone entities. For a Merton-type model, we derive some formulas for these joint distribu- tions. As an application, closed formulas for counterparty risk on a CDS or for a first-to-default swap on two underlyings are obtained.

Suggested Citation

  • Christophette Blanchet-Scalliet & Fr'ed'eric Patras, 2008. "Counterparty risk valuation for CDS," Papers 0807.0309,
  • Handle: RePEc:arx:papers:0807.0309

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    2. Piotrowski, Edward W & Sładkowski, Jan, 2004. "Arbitrage risk induced by transaction costs," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 331(1), pages 233-239.
    3. Szczypińska, Anna & Piotrowski, Edward W., 2008. "Projective market model approach to AHP decision making," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(15), pages 3982-3986.
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    7. Edward W. Piotrowski & Jan Sladkowski, "undated". "Geometry of Financial Markets - Towards Information Theory Model of Markets," Departmental Working Papers 26, University of Bialtystok, Department of Theoretical Physics.
    8. Piotrowski, Edward W. & Sładkowski, Jan, 2007. "Geometry of financial markets—Towards information theory model of markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 228-234.
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    Cited by:

    1. Metzler, Adam, 2010. "On the first passage problem for correlated Brownian motion," Statistics & Probability Letters, Elsevier, vol. 80(5-6), pages 277-284, March.
    2. Bao, Qunfang & Chen, Si & Liu, Guimei & Li, Shenghong, 2010. "Unilateral CVA for CDS in Contagion model: With volatilities and correlation of spread and interest," MPRA Paper 28250, University Library of Munich, Germany, revised 27 Dec 2010.
    3. Loon, Yee Cheng & Zhong, Zhaodong Ken, 2014. "The impact of central clearing on counterparty risk, liquidity, and trading: Evidence from the credit default swap market," Journal of Financial Economics, Elsevier, vol. 112(1), pages 91-115.
    4. Calice, Giovanni, 2011. "The Impact of Collateral Policies on Sovereign CDS Spreads," ECMI Papers 12234, Centre for European Policy Studies.
    5. Arora, Navneet & Gandhi, Priyank & Longstaff, Francis A., 2012. "Counterparty credit risk and the credit default swap market," Journal of Financial Economics, Elsevier, vol. 103(2), pages 280-293.
    6. repec:kap:revdev:v:20:y:2017:i:1:d:10.1007_s11147-016-9123-1 is not listed on IDEAS
    7. Bao, Qunfang & Chen, Si & Li, Shenghong, 2012. "Unilateral CVA for CDS in a contagion model with stochastic pre-intensity and interest," Economic Modelling, Elsevier, vol. 29(2), pages 471-477.
    8. Bao, Qunfang & Chen, Si & Liu, Guimei & Li, Shenghong, 2010. "Unilateral CVA for CDS in Contagion Model_with Volatilities and Correlation of Spread and Interest," MPRA Paper 26277, University Library of Munich, Germany.
    9. Wai-Ki Ching & Jia-Wen Gu & Harry Zheng, 2014. "On Correlated Defaults and Incomplete Information," Papers 1409.1393,, revised Jan 2016.
    10. Li, Hui, 2009. "Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery," MPRA Paper 19684, University Library of Munich, Germany.
    11. M. H. A. Davis & M. R. Pistorius, 2013. "Explicit solution of an inverse first-passage time problem for L\'{e}vy processes and counterparty credit risk," Papers 1306.2719,, revised Sep 2015.
    12. Andrey Itkin & Alexander Lipton, 2017. "Structural default model with mutual obligations," Review of Derivatives Research, Springer, vol. 20(1), pages 15-46, April.
    13. Harb, Etienne & Louhichi, Wael, 2017. "Pricing CDS spreads with Credit Valuation Adjustment using a mixture copula," Research in International Business and Finance, Elsevier, vol. 39(PB), pages 963-975.
    14. repec:wsi:ijtafx:v:16:y:2013:i:03:n:s0219024913500131 is not listed on IDEAS

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