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Pricing Credit Default Swaps Under Default Correlations and Counterparty Risk

Author

Listed:
  • Li Chen

    (Princeton University)

  • Damir Filipovic

    (Princeton University)

Abstract

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.

Suggested Citation

  • Li Chen & Damir Filipovic, 2003. "Pricing Credit Default Swaps Under Default Correlations and Counterparty Risk," Finance 0303009, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0303009
    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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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0303/0303009.pdf
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    References listed on IDEAS

    as
    1. 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 449-470, May.
    2. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
    3. Li Chen & Damir Filipovic, 2003. "Modeling Credit Risk by Affine Processes," Finance 0303006, University Library of Munich, Germany.
    4. 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..
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Li Chen & Damir Filipovic, 2003. "A Simple Model for Credit Migration and Spread Curves," Finance 0305003, University Library of Munich, Germany.
    2. Alexander Lipton & Ioana Savescu, 2012. "Pricing credit default swaps with bilateral value adjustments," Papers 1207.6049, arXiv.org.

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    More about this item

    Keywords

    affine models; credit default swaps; credit risk; counterparty risk;
    All these keywords.

    JEL classification:

    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other

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