Unilateral counterparty risk valuation of CDS using a regime-switching intensity model

Yinghui Dong, Kam C. Yuen and Chongfeng Wu

Statistics & Probability Letters, 2014, vol. 85, issue C, 25-35

Abstract: We consider the unilateral credit valuation adjustment (CVA) of a credit default swap (CDS) under a contagion model with regime-switching interacting intensities. The model assumes that the interest rate, the recovery, and the default intensities of the protection seller and the reference entity are all influenced by macro-economy described by a homogeneous Markov chain. By using the idea of “change of measure” and some formulas for the Laplace transforms of the integrated intensity processes, we derive the semi-analytical formulas for the joint distribution of the default times and the unilateral CVA of a CDS.

Keywords: Credit default swaps; Counterparty risk; Credit valuation adjustment; Interacting intensities; Regime-switching (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.spl.2013.11.001

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