Pricing credit default swaps with bilateral value adjustments

Alexander Lipton and Ioana Savescu

Papers from arXiv.org

Abstract: A three-dimensional extension of the structural default model with firms' values driven by correlated diffusion processes is presented. Green's function based semi-analytical methods for solving the forward calibration problem and backward pricing problem are developed. These methods are used to analyze bilateral counterparty risk for credit default swaps and evaluate the corresponding credit and debt value adjustments. It is shown that in many realistic cases these value adjustments can be surprisingly large.

Date: 2012-07
New Economics Papers: this item is included in nep-ban
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