Pricing Credit Default Swap Subject to Counterparty Risk and Collateralization

Tim Xiao

MPRA Paper from University Library of Munich, Germany

Abstract: This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset pricing. In fact, correlated default risk is one of the most pervasive threats in financial markets. We also show that a fully collateralized CDS is not equivalent to a risk-free one. In other words, full collateralization cannot eliminate counterparty risk completely in the CDS market.

Keywords: valuation model; credit risk modeling; collateralization; correlation, CDS. (search for similar items in EconPapers)
JEL-codes: D46 G01 G12 G13 G17 (search for similar items in EconPapers)
Date: 2019-03-06
New Economics Papers: this item is included in nep-ore and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:94701

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