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Enemies or Allies: Pricing counterparty credit risk for synthetic CDO tranches


  • Lee, Y.
  • So, Leh-chyan


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.

Suggested Citation

  • Lee, Y. & So, Leh-chyan, 2013. "Enemies or Allies: Pricing counterparty credit risk for synthetic CDO tranches," MPRA Paper 52371, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:52371

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    References listed on IDEAS

    1. Robert A. Jarrow & Fan Yu, 2008. "Counterparty Risk and the Pricing of Defaultable Securities," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 20, pages 481-515 World Scientific Publishing Co. Pte. Ltd..
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    More about this item


    counterparty credit risk; synthetic CDO tranches; CDX NA IG index tranches; Gaussian copula model; credit value adjustment;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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