Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

Alan White ()
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Alan White: FinPricing

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Abstract: 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.

Keywords: valuation model; credit risk modeling; collateralization; correlation; CDS 1 (search for similar items in EconPapers)
Date: 2018-03-20
New Economics Papers: this item is included in nep-rmg and nep-ure
Note: View the original document on HAL open archive server: https://hal.science/hal-01739310
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