CONTAGION EFFECTS AND COLLATERALIZED CREDIT VALUE ADJUSTMENTS FOR CREDIT DEFAULT SWAPS

Rüdiger Frey () and Lars Rösler ()
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Rüdiger Frey: Department of Finance, Accounting and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, D4, 1020 Vienna, Austria
Lars Rösler: Department of Finance, Accounting and Statistics, Vienna University of Economics and Business, Welthandelsplatz 1, D4, 1020 Vienna, Austria

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 07, 1-29

Abstract: The paper is concerned with counterparty credit risk for credit default swaps in the presence of default contagion. In particular, we study the impact of default contagion on credit value adjustments such as the Bilateral Collateralized Credit Value Adjustment (BCCVA) of Brigo et al. (2014) and on the performance of various collateralization strategies. We use the incomplete-information model of Frey & Schmidt (2012) for our analysis. We find that contagion effects have a substantial impact on the effectiveness of popular collateralization strategies. We go on and derive improved collateralization strategies that account for contagion. Theoretical results are complemented by a simulation study.

Keywords: Counterparty credit risk; bilateral credit value adjustment; collateralization; credit default swap; contagion; incomplete information (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024914500447

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