Counterparty risk for credit default swaps: impact of spread volatility and default correlation

DOI10.1142/S0219024909005567zbMATH Open1187.91206arXiv1204.2090OpenAlexW3124950891MaRDI QIDQ3655554FDOQ3655554

Authors: Damiano Brigo, Kyriakos Chourdakis 

Publication date: 8 January 2010

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: This paper deals with dependence across marginally exponentially distributed arrival times, such as default times in financial modeling or inter-failure times in reliability theory. We explore the relationship between dependence and the possibility to sample final multivariate survival in a long time-interval as a sequence of iterations of local multivariate survivals along a partition of the total time interval. We find that this is possible under a form of multivariate lack of memory that is linked to a property of the survival times copula. This property defines a "self-chaining-copula", and we show that this coincides with the extreme value copulas characterization. The self-chaining condition is satisfied by the Gumbel-Hougaard copula, a full characterization of self chaining copulas in the Archimedean family, and by the Marshall-Olkin copula. The result has important practical implications for consistent single-step and multi-step simulation of multivariate arrival times in a way that does not destroy dependency through iterations, as happens when inconsistently iterating a Gaussian copula.

Full work available at URL: https://arxiv.org/abs/1204.2090

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zbMATH Keywords

copula functionsdefault correlationcounterparty riskcredit default swapscredit valuation adjustmentstochastic intensitywrong way riskcredit spread volatilitycontingent credit default swaps

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Credit risk (91G40)

Cites Work

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Cited In (54)

• Valuation of credit default swaps with contagious default correlation
• A versatile approach for stochastic correlation using hyperbolic functions
• Pricing credit default swaps under a multi-scale stochastic volatility model
• Tight semi-model-free bounds on (bilateral) CVA
• Contagion effects and collateralized credit value adjustments for credit default swaps
• Arbitrage-free valuation of bilateral counterparty risk for interest-rate products: impact of volatilities and correlations
• Liquidity tail risk and credit default swap spreads
• Optimal investment under multiple defaults risk: a BSDE-decomposition approach
• Markov multi-variate survival indicators for default simulation as a new characterization of the Marshall-Olkin law
• Credit derivative evaluation and CVA under the benchmark approach
• Credit default swap pricing with counterparty risk in a reduced form model with a common jump process
• Counterparty risk for credit default swaps: Markov chain interacting intensities model with stochastic intensity
• Semi-analytical formula for pricing bilateral counterparty risk of CDS with correlated credit risks
• CVA under alternative settlement conventions and with systemic risk
• CVA and FVA to derivatives trades collateralized by cash
• Counterparty risk for credit default swap with states related default intensity processes
• Pricing and hedging barrier options in a hyper-exponential additive model
• Analytical valuation of vulnerable European and Asian options in intensity-based models
• The pricing of credit default swaps under a generalized mixed fractional Brownian motion
• Nonlinearity valuation adjustment. Nonlinear valuation under collateralization, credit risk, and funding costs
• A multivariate default model with spread and event risk
• FIRST-TO-DEFAULT AND SECOND-TO-DEFAULT OPTIONS IN MODELS WITH VARIOUS INFORMATION FLOWS
• RANDOM TIME FORWARD-STARTING OPTIONS
• Pricing credit default swaps with bilateral value adjustments
• The impact of different correlation approaches on valuing credit default swaps with counterparty risk
• Valuation and hedging of CDS counterparty exposure in a Markov copula model
• The dynamic correlation model and its application to the Heston model
• Pricing derivatives with counterparty risk and collateralization: a fixed point approach
• Modelling and calibration of stochastic correlation in finance
• Multi-currency credit default swaps
• Numerical evaluation of complex logarithms in the Cox-Ingersoll-Ross model
• Unilateral counterparty risk valuation for CDS under a regime switching interacting intensities model
• Valuing fade-in options with default risk in Heston-Nandi GARCH models
• Bilateral counterparty risk valuation on a CDS with a common shock model
• Restructuring counterparty credit risk
• An analytical approach for systematic risk sensitivity of structured finance products
• Counterparty risk pricing under correlation between default and interest rates
• Extremal dependence for bilateral credit valuation adjustments
• A note on the double impact on CVA for CDS: wrong-way risk with stochastic recovery
• COCO BONDS PRICING WITH CREDIT AND EQUITY CALIBRATED FIRST-PASSAGE FIRM VALUE MODELS
• Counterparty risk pricing: impact of closeout and first-to-default times
• Credit default swaps in two-dimensional models with various informations flows
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• Nonlinear valuation under credit, funding, and margins: existence, uniqueness, invariance, and disentanglement
• Credit default swaps with and without counterparty and collateral adjustments
• Counterparty risk and the impact of collateralization in CDS contracts
• Pricing counterparty risk including collateralization, netting rules, re-hypothecation and wrong-way risk
• Bilateral counterparty risk under funding constraints. II: CVA
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• An approximation formula for the price of credit default swaps under the fast-mean reversion volatility model.
• A Spread-Based Model for the Valuation of Credit Derivatives with Correlated Defaults and Counter-Party Risks
• Nonlinear Monte Carlo schemes for counterparty risk on credit derivatives
• Bilateral counterparty risk valuation of CDS contracts with simultaneous defaults
• Chi-square simulation of the CIR process and the Heston model

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