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Contagion Effects And Collateralized Credit Value Adjustments For Credit Default Swaps

Author

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  • RÜDIGER FREY

    (Department of Finance, Accounting and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, D4, 1020 Vienna, Austria)

  • LARS RÖSLER

    (Department of Finance, Accounting and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, D4, 1020 Vienna, Austria)

Abstract

The paper is concerned with counterparty credit risk for credit default swaps in the presence of default contagion. In particular, we study the impact of default contagion on credit value adjustments such as the Bilateral Collateralized Credit Value Adjustment (BCCVA) of Brigo et al. (2014) and on the performance of various collateralization strategies. We use the incomplete-information model of Frey & Schmidt (2012) for our analysis. We find that contagion effects have a substantial impact on the effectiveness of popular collateralization strategies. We go on and derive improved collateralization strategies that account for contagion. Theoretical results are complemented by a simulation study.

Suggested Citation

  • Rüdiger Frey & Lars Rösler, 2014. "Contagion Effects And Collateralized Credit Value Adjustments For Credit Default Swaps," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(07), pages 1-29.
    • Handle: RePEc:wsi:ijtafx:v:17:y:2014:i:07:n:s0219024914500447
    DOI: 10.1142/S0219024914500447
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    Cited by:

    1. Claudia Ceci & Katia Colaneri & Rdiger Frey & Verena Kock, 2019. "Value adjustments and dynamic hedging of reinsurance counterparty risk," Papers 1909.04354, arXiv.org.

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