A model for dependent defaults and pricing contingent claims with counterparty risk

Dariusz Gatarek and Juliusz Jabłecki ()
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Dariusz Gatarek: HVB Unicredit and Systems Research Institute, Polish Academy of Sciences

No 150, NBP Working Papers from Narodowy Bank Polski

Abstract: This paper presents a new, intuitive but mathematically powerful model of dependent defaults and derives a general framework for pricing products whose values depend on credit correlation between the counterparty and the reference entity. The dependence framework is a natural extension of the Gaussian factor approach, which can be applied in the context of reduced form credit risk models, allowing i.a. for stochastic hazard and recovery rates. The prices of plain vanilla credit default swaps, first-to-default swaps and default swaptions are derived as particular examples.

Keywords: default correlation; counterparty risk; reduced form models (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 27
Date: 2013
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:150

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