VALUATION AND HEDGING OF CDS COUNTERPARTY EXPOSURE IN A MARKOV COPULA MODEL-Reference-Cited by-同舟云学术

VALUATION AND HEDGING OF CDS COUNTERPARTY EXPOSURE IN A MARKOV COPULA MODEL

Published:2012-02 Issue:01 Volume:15 Page:1250004
ISSN:0219-0249
Container-title:International Journal of Theoretical and Applied Finance
language:en
Short-container-title:Int. J. Theor. Appl. Finan.

Author:

BIELECKI T. R.¹,CRÉPEY S.²,JEANBLANC M.²,ZARGARI B.²³

Affiliation:

1. Department of Applied Mathematics, Illinois Institute of Technology, 10 W 32nd Street, Chicago, IL 60616, USA

2. Université d'Evry, Laboratoire d'Analyse & Probabilitiés, 23 Boulevard de France, 91037 Evry, France

3. Sharif University of Technology, Iran

Abstract

A Markov model is constructed for studying the counterparty risk in a CDS contract. The "wrong-way risk" in this model is accounted for by the possibility of the common default of the reference name and of the counterparty. A dynamic copula property as well as affine model specifications make pricing and calibration very efficient. We also consider the issue of dynamically hedging the CVA with a rolling CDS written on the counterparty. Numerical results are presented to show the adequacy of the behavior of CVA in the model with stylized features.

Publisher

World Scientific Pub Co Pte Lt

Subject

General Economics, Econometrics and Finance,Finance

Link

https://www.worldscientific.com/doi/pdf/10.1142/S0219024911006498

Reference22 articles.

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2. A Markov copulae approach to pricing and hedging of credit index derivatives and ratings triggered step-up bonds

3. Pricing and trading credit default swaps in a hazard process model

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