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A structural approach to pricing credit default swaps with credit and debt value adjustments

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  • Alexander Lipton
  • Ioana Savescu

Abstract

A multi-dimensional extension of the structural default model with firms' values driven by diffusion processes with Marshall-Olkin-inspired correlation structure is presented. Semi-analytical methods for solving the forward calibration problem and backward pricing problem in three dimensions are developed. The model is used to analyze bilateral counterparty risk for credit default swaps and evaluate the corresponding credit and debt value adjustments.

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  • Alexander Lipton & Ioana Savescu, 2012. "A structural approach to pricing credit default swaps with credit and debt value adjustments," Papers 1206.3104, arXiv.org.
    • Handle: RePEc:arx:papers:1206.3104
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    References listed on IDEAS

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    1. Zhou, Chunsheng, 2001. "An Analysis of Default Correlations and Multiple Defaults," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 555-576.
    2. Hua He & William P. Keirstead & Joachim Rebholz, 1998. "Double Lookbacks," Mathematical Finance, Wiley Blackwell, vol. 8(3), pages 201-228, July.
    3. Alexander Lipton, 2001. "Mathematical Methods for Foreign Exchange:A Financial Engineer's Approach," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 4694, February.
    4. Christophette Blanchet-Scalliet & Frédéric Patras, 2011. "Structural Counterparty Risk Valuation for Credit Default Swaps," Post-Print hal-00594194, HAL.
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