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

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

Kyriakos Chourdakis, Damiano Brigo

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 (51)

• A versatile approach for stochastic correlation using hyperbolic functions
• The Dynamic Correlation Model and Its Application to the Heston Model
• Pricing credit default swaps under a multi-scale stochastic volatility model
• CVA UNDER ALTERNATIVE SETTLEMENT CONVENTIONS AND WITH SYSTEMIC RISK
• Modelling and Calibration of Stochastic Correlation in Finance
• Liquidity tail risk and credit default swap spreads
• Optimal investment under multiple defaults risk: a BSDE-decomposition approach
• VALUATION AND HEDGING OF CDS COUNTERPARTY EXPOSURE IN A MARKOV COPULA MODEL
• 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
• MULTI-CURRENCY CREDIT DEFAULT SWAPS
• 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
• RESTRUCTURING COUNTERPARTY CREDIT RISK
• 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
• COUNTERPARTY RISK PRICING: IMPACT OF CLOSEOUT AND FIRST-TO-DEFAULT TIMES
• CONTAGION EFFECTS AND COLLATERALIZED CREDIT VALUE ADJUSTMENTS FOR CREDIT DEFAULT SWAPS
• FIRST-TO-DEFAULT AND SECOND-TO-DEFAULT OPTIONS IN MODELS WITH VARIOUS INFORMATION FLOWS
• ARBITRAGE-FREE VALUATION OF BILATERAL COUNTERPARTY RISK FOR INTEREST-RATE PRODUCTS: IMPACT OF VOLATILITIES AND CORRELATIONS
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• CREDIT DEFAULT SWAPS IN TWO-DIMENSIONAL MODELS WITH VARIOUS INFORMATIONS FLOWS
• Pricing credit default swaps with bilateral value adjustments
• Pricing derivatives with counterparty risk and collateralization: a fixed point approach
• Numerical evaluation of complex logarithms in the Cox–Ingersoll–Ross model
• Nonlinear Monte Carlo Schemes for Counterparty Risk on Credit Derivatives
• BILATERAL COUNTERPARTY RISK UNDER FUNDING CONSTRAINTS—PART II: CVA
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• Tight Semi-model-free Bounds on (Bilateral) CVA
• 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
• An analytical approach for systematic risk sensitivity of structured finance products
• COUNTERPARTY RISK FOR CREDIT DEFAULT SWAP WITH STATES RELATED DEFAULT INTENSITY PROCESSES
• Counterparty risk pricing under correlation between default and interest rates
• Extremal dependence for bilateral credit valuation adjustments
• BILATERAL COUNTERPARTY RISK VALUATION OF CDS CONTRACTS WITH SIMULTANEOUS DEFAULTS
• 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
• WRONG-WAY RISK CVA MODELS WITH ANALYTICAL EPE PROFILES UNDER GAUSSIAN EXPOSURE DYNAMICS
• Nonlinear valuation under credit, funding, and margins: existence, uniqueness, invariance, and disentanglement
• Credit default swaps with and without counterparty and collateral adjustments
• Nonlinearity Valuation Adjustment
• A Multivariate Default Model with Spread and Event Risk
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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
• Chi-square simulation of the CIR process and the Heston model

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