Bilateral counterparty risk valuation for credit default swap in a contagion model using Markov chain

Yinghui Dong and Guojing Wang

Economic Modelling, 2014, vol. 40, issue C, 91-100

Abstract: The computation of the bilateral counterparty valuation adjustment for a credit default swap (CDS) contract is in effect the modeling of the default dependence among the investor, the protection seller, and the reference entity. We present a contagion model, where defaults of three parties are all driven by a common continuous-time Markov chain describing the macroeconomic conditions. We give the explicit formula for the bilateral credit valuation adjustment (CVA) of CDS and examine the effect of the regime switching on the CVA.

Keywords: Credit default swap; Counterparty risk; Credit valuation adjustment; Contagion model; Markov chain (search for similar items in EconPapers)
JEL-codes: C15 C63 G12 G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S026499931400090X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:40:y:2014:i:c:p:91-100

DOI: 10.1016/j.econmod.2014.03.004

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().