Numerical analysis of an extended structural default model with mutual liabilities and jump risk

Vadim Kaushansky, Alexander Lipton and Christoph Reisinger

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Abstract: We consider a structural default model in an interconnected banking network as in Lipton [International Journal of Theoretical and Applied Finance, 19(6), 2016], with mutual obligations between each pair of banks. We analyse the model numerically for two banks with jumps in their asset value processes. Specifically, we develop a finite difference method for the resulting two-dimensional partial integro-differential equation, and study its stability and consistency. We then compute joint and marginal survival probabilities, as well as prices of credit default swaps (CDS), first-to-default swaps (FTD), credit and debt value adjustments (CVA and DVA). Finally, we calibrate the model to market data and assess the impact of jump risk.

Date: 2016-12
New Economics Papers: this item is included in nep-ban, nep-cmp and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1701.00030

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