Counterparty Risk and the Pricing of Defaultable Securities

Robert Jarrow () and Fan Yu
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Fan Yu: Graduate School of Management, University of California at Irvine, USA

Chapter 20 in Financial Derivatives Pricing:Selected Works of Robert Jarrow, 2008, pp 481-515 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractMotivated by recent financial crises in East Asia and the United States where the downfall of a small number of firms had an economy-wide impact, this paper generalizes existing reduced-form models to include default intensities dependent on the default of a counterparty. In this model, firms have correlated defaults due not only to an exposure to common risk factors, but also to firm-specific risks that are termed "counterparty risks." Numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps.

Keywords: Derivatives; Options; Hedging; HJM; Black–Scholes; Forwards; Futures; Martingale Measure; Calls; Puts; Market Manipulation; Margin Requirements (search for similar items in EconPapers)
Date: 2008
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Journal Article: Counterparty Risk and the Pricing of Defaultable Securities (2001)
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