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A model for dependent defaults and pricing contingent claims with counterparty risk

Author

Listed:
  • Dariusz Gatarek

    (HVB Unicredit and Systems Research Institute, Polish Academy of Sciences)

  • Juliusz Jabłecki

    (Economic Institute, National Bank of Poland and Faculty of Economic Sciences)

Abstract

This paper presents a new, intuitive but mathematically powerful model of dependent defaults and derives a general framework for pricing products whose values depend on credit correlation between the counterparty and the reference entity. The dependence framework is a natural extension of the Gaussian factor approach, which can be applied in the context of reduced form credit risk models, allowing i.a. for stochastic hazard and recovery rates. The prices of plain vanilla credit default swaps, first-to-default swaps and default swaptions are derived as particular examples.

Suggested Citation

  • Dariusz Gatarek & Juliusz Jabłecki, 2013. "A model for dependent defaults and pricing contingent claims with counterparty risk," NBP Working Papers 150, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:150
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    References listed on IDEAS

    as
    1. Chunsheng Zhou, 1997. "Default correlation: an analytical result," Finance and Economics Discussion Series 1997-27, Board of Governors of the Federal Reserve System (U.S.).
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Cited by:

    1. Feng Jianfen & Yu Mei & Chen Dianfa, 2014. "Pricing Defaultable Securities under Actual Probability Measure," Journal of Systems Science and Information, De Gruyter, vol. 2(4), pages 313-334, August.
    2. Cantia, Catalin & Tunaru, Radu, 2017. "A factor model for joint default probabilities. Pricing of CDS, index swaps and index tranches," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 21-35.

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    More about this item

    Keywords

    default correlation; counterparty risk; reduced form models;
    All these keywords.

    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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