This paper provides a methodology for valuing credit default swaps (CDS). In these financial instruments a sequence of payments is promised in return for protection against the credit losses in the event of default. Given the widespread use of credit default swaps, one major concern is whether the credit risk has been priced accurately. Credit risk assessment of counterparty is an area of renew...

Abstract The high level of economic uncertainty linked to the pace recovery process can persist after a crisis and has implications for market pricing firms’ credit risk reflected in default swap (CDS) spreads. This paper examines role key proxies state its real-time determining Northern American CDX index Focusing on period following 2007–2009 global financial crisis, we find that measures out...

The goal of this paper is to determine the Incremental Risk Charge (IRC) and the Comprehensive Risk Measure (CRM) of a portfolio consisting of credit derivatives and tranches. More specifically, we implement different methods to calibrate default intensity models, backtest our IRC calculations over historical data, and focus our attention on a basket of Credit Default Swaps (CDS).

In the Black-Cox model, a firm makes default when its value hits an exponential barrier. Here, we propose an hybrid model that generalizes this framework. The default intensity can take two different values and switches when the firm value crosses the barrier. Of course, the intensity level is higher below the barrier. We get an analytic formula for the Laplace transform of the default time and...

Previous studies focused on the fundamental channels of interaction between equity market and credit default swap (CDS) market. This paper finds another channel, investor sentiment, that contributes to impact CDS under different time horizons conditions within framework wavelet quantile regression. It absorbs both merits transform regression is advantageous in analyzing heterogeneous full condi...

We develop an arbitrage-free valuation framework for bilateral counterparty risk, where collateral is included with possible re-hypothecation. We show that the adjustment is given by the sum of two option payoff terms, where each term depends on the netted exposure, i.e. the difference between the on-default exposure and the pre-default collateral account. We then specialize our analysis to Cre...

This paper presents a conceptual framework for valuation of single-name credit derivatives, and recuperates, in some cases generalizing, a few of known results in credit risk theory. Valuation is viewed with respect to a given state price and relative to a general numeraire. Survival probabilities and default recoveries are considered as processes adapted to a subfiltration, following Jeanblanc...

We provide an inventory of existing forms of transparency in CDS markets and discuss methods that may be used to increase transparency as well as their benefits and costs. In particular, we attempt to identify to whom such benefits and costs accrue (broker-dealers, end users, etc). We argue that increased market transparency has a cost, which must be weighed against its benefits in terms of mar...

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 ...