Bilateral Counterparty Risk Valuation on a CDS with a Common Shock Model

Yinghui Dong (), Guojing Wang and Kam C. Yuen
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Yinghui Dong: Suzhou University of Science and Technology
Guojing Wang: Soochow University
Kam C. Yuen: University of Hong Kong

Methodology and Computing in Applied Probability, 2014, vol. 16, issue 3, 643-673

Abstract: Abstract In this paper, we study the counterparty risk on a CDS in a common shock model. We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk. Especially, we consider the pricing problem of credit default swap with counterparty risk under a common shock model with regime switching. The arrivals of the shock events are modeled by conditionally independent Cox processes whose stochastic intensities depend on the state of the economy described by a Markov chain. We give the explicit formula for the credit valuation adjustment (CVA) and examine the impact of the change of economic state on the CVA.

Keywords: Counterparty credit risk; CDS; Credit valuation adjustment; Cox process; Regime switching; 49K15; 44A10; 47D07 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11009-013-9323-1

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