Two new equity default swaps with idiosyncratic risk

Zhaojun Yang and Chunhong Zhang

International Review of Economics & Finance, 2015, vol. 37, issue C, 254-273

Abstract: We investigate two new types of equity default swaps: an equity-for-guarantee swap (EGS) and an option-for-guarantee swap (OGS). We calculate equilibrium prices for all components of the two swaps. Then we switch to utility-based prices of the entrepreneur's claims. Our analysis shows that under the equilibrium pricing, EGS is better than OGS but under the utility-based pricing, OGS is generally better than EGS. The OGS advantage over EGS increases quickly with the firm's cash flow level and is generally more pronounced when either the risk aversion, cash flow risk or the correlation between the cash flow and the market increases.

Keywords: Option-for-guarantee swap; Guarantee costs; Utility-based prices; Nash equilibrium (search for similar items in EconPapers)
JEL-codes: C61 G11 G31 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:37:y:2015:i:c:p:254-273

DOI: 10.1016/j.iref.2014.11.027

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