 Unilateral CVA for CDS in a contagion model with stochastic pre-intensity and interestQunfang Bao, Si Chen and Shenghong Li Economic Modelling, 2012, vol. 29, issue 2, 471-477 Abstract: Price of a financial derivative with unilateral counterparty credit risk equals to the price of an otherwise risk-free derivative minus a credit value adjustment (CVA) component, which can be seen as a call option on investor's NPV with strike 0. Thus modeling volatility of NPV is the foundation for CVA valuation. This paper assumes that default times of counterparty and reference firm follow a special contagion model with stochastic pre-intensities that allows for explicit formulas for default probabilities. Stochastic interest rate is also incorporated to account for positive correlation between pre-intensity and interest. Survival measure approach is employed to calculate NPV of a risk-free CDS, and semi-analytical solution for CVA is obtained through affine specifications. Numerical analysis shows that contagion has more significant impact on CVA than diffusion of pre-intensities, and the positive correlation between interest and reference firm's pre-intensity has monotonic decreasing impact on CVA. Keywords: Credit value adjustment; Contagion model; Stochastic pre-intensities and interest; Survival measure; Affine specification (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:2:p:471-477 DOI: 10.1016/j.econmod.2011.12.002 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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