Enemies or Allies: Pricing counterparty credit risk for synthetic CDO tranches
This research aims to construct a model for pricing counterparty credit risk (CCR) for synthetic collateralized debt obligation (CDO) tranches by considering the relationship between the counterparty and the credit port- folio. A stochastic intensity model is adopted to describe the default event of the counterparty, and a two-factor Gaussian copula model is applied to account for the relationship between the counterparty and underlying credit portfolio. By analyzing the data of CDX NA IG index tranches, we �nd that the relationship has a signi�cant in uence on the credit value adjust- ment (CVA) for index tranches and, hence, that it should not be ignored when a contract is initiated. In addition, we discover that the in uence has opposite e�ects and asymmetrical magnitude with respect to the protection buyers and protection sellers.
|Date of creation:||2013|
|Date of revision:|
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- Damiano Brigo & Kyriakos Chourdakis, 2009. "Counterparty Risk For Credit Default Swaps: Impact Of Spread Volatility And Default Correlation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(07), pages 1007-1026.
- Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
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