Pricing Credit Default Swaps Under Default Correlations and Counterparty Risk
In this paper, we develop a generalized affine model to characterize correlated credit risk of multi-firms. When valuing credit derivatives, this new approach allows to incorporate correlative market and credit risk, interdependent default risk structure and counterparty risk into consideration. We have demonstrated our affine model not only combines the existing structural models and intensity based models, but also produces explicit formulas for the prices of credit default swaps and other credit derivatives.
|Date of creation:||31 Mar 2003|
|Date of revision:|
|Note:||Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 22 ; figures: none. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.|
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References listed on IDEAS
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- 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.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
- Li Chen & Damir Filipovic, 2003. "Modeling Credit Risk by Affine Processes," Finance 0303006, EconWPA.
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