This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Pricing Financial Contracts Subject to Multiple Credit Risks
- Numerical Results
- Conclusions
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This article aims to develop a new model for valuing a credit default swap (CDS) contract that accounts for multiple credit risks, including those of the buyer, seller, and reference entity. The model focuses on the impact of default dependencies on asset pricing and the implications of collateralization for counterparty risk in the CDS market.
- Modeling Default Dependencies in CDS Contracts
- Impact of Default Correlations and Comrelations on Asset Pricing
- The Role of Collateralization in Mitigating Counterparty Risk
- Analysis of Trilateral Credit Risk in CDS Contracts
- Evaluation of the Standard CDS Pricing Model in Times of Distress
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: This chapter provides an overview of the existing literature on default modeling, highlighting the limitations of traditional reduced-form models and the importance of accounting for default dependencies. It discusses the need for new models that incorporate both endogenous and exogenous approaches to capture default relationships.
- Pricing Financial Contracts Subject to Multiple Credit Risks: This chapter presents a new framework for valuing defaultable financial contracts, focusing on CDS contracts with trilateral credit risk. The framework introduces the concept of comvariance to capture the statistical relationship among three or more random variables and defines a new statistic, comrelation, as a scaled version of comvariance.
- Numerical Results: This chapter presents numerical results illustrating the impact of default correlations and comrelations on CDS premia. It analyzes the different levels of default dependency and their effects on asset pricing and risk management.
Schlüsselwörter (Keywords)
The primary keywords and focus topics of the text are: valuation model, credit risk modeling, collateralization, correlation, CDS, default dependencies, comvariance, comrelation, trilateral credit risk, counterparty risk, financial stability.
- Citar trabajo
- Alan White (Autor), 2018, Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization, Múnich, GRIN Verlag, https://www.grin.com/document/417474
