Credit Default Swap Calibration and Equity Swap Valuation under Counterparty Risk with a Tractable Structural Model
نویسندگان
چکیده
In this paper we develop a tractable structural model with analytical default probabilities depending on some dynamics parameters, and we show how to calibrate the model using a chosen number of Credit Default Swap (CDS) market quotes. We essentially show how to use structural models with a calibration capability that is typical of the much more tractable credit-spread based intensity models. We apply the structural model to a concrete calibration case and observe what happens to the calibrated dynamics when the CDS-implied credit quality deteriorates as the firm approaches default. Finally we provide a typical example of a case where the calibrated structural model can be used for credit pricing in a much more convenient way than a calibrated reduced form model: The pricing of counterparty risk in an equity swap.
منابع مشابه
Credit Default Swap Calibration and Counterparty Risk Valuation with a Scenario based First Passage Model ∗
In this work we develop a tractable structural model with analytical default probabilities depending on a random default barrier and possibly random volatility ideally associated with a scenario based underlying firm debt. We show how to calibrate this model using a chosen number of reference Credit Default Swap (CDS) market quotes. In general this model can be seen as a possible extension of t...
متن کاملCredit Calibration with Structural Models: The Lehman case and Equity Swaps under Counterparty Risk
In this paper we develop structural first passage models (AT1P and SBTV) with time-varying volatility and characterized by high tractability, moving from the original work of Brigo and Tarenghi (2004, 2005) [19] [20] and Brigo and Morini (2006)[15]. The models can be calibrated exactly to credit spreads using efficient closed-form formulas for default probabilities. Default events are caused by...
متن کاملCredit Default Swap Valuation with Counterparty Risk ∗
Using the reduced form framework with inter-dependent default correlation, we perform valuation of credit default swap with counterparty risk. The inter-dependent default risk structure between the protection buyer, protection seller and the reference entity in a credit default swap are characterized by their correlated default intensities, where the default intensity of one party increases whe...
متن کاملCredit Valuation Adjustment
Credit risk has become a topical issue since the 2007 Credit Crisis, particularly for its impact on the valuation of OTC derivatives. This becomes critical when the credit risk of entities involved in a contract either as underlying or counterparty become highly correlated as is the case during macroeconomic shocks. It impacts the valuation of such contracts through an additional term, the cred...
متن کاملCredit Default Swaps with Counterparty Risk: A Calibrated Markov Model
This article describes a continuous-time Markov approach to the riskneutral pricing of a credit default swap with counterparty risk. The key parameters in the approach are the transition rates, which naturally incorporate the ideas of contagion. Correlation (which is time-dependent) is a derived quantity, which results from contagion. An expansion in powers of a small parameter (a risk-neutral ...
متن کامل