The Valuation of Credit Default Swap with Counterparty Risk and Collateralization
- Tim Xiao (see profile)
- Business Management
- Item Type:
- valuation model; credit risk modeling; collateralization; correlation, CDS.
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- 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.
- Additional material: https://figshare.com/articles/The_Valuation_of_Credit_Default_Swap_with_Counterparty_Risk_and_Collateralization/12497342/files/23184398.pdf
- Last Updated:
- 3 years ago
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