Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

Tim Xiao

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: This article presents a new model for valuing financial contracts subject to credit risk and collateralization. Examples include the valuation of a credit default swap (CDS) contract that is affected by the trilateral credit risk 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: asset pricing; credit risk modeling; collateralization; comvariance; comrelation; correlation; CDS (search for similar items in EconPapers)
JEL-codes: E44 G12 G18 G21 G24 G28 G32 G33 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-rmg
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https://www.econstor.eu/bitstream/10419/202075/1/pricing%20credit%20risk-9.pdf (application/pdf)

Related works:
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
Working Paper: Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:202075

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