Counterparty Risk for Credit Default Swaps: Markov Chain Interacting Intensities Model with Stochastic Intensity Authors
First Online: 29 May 2009 Received: 12 April 2009 Accepted: 13 May 2009 DOI:
Cite this article as: Leung, K.S. & Kwok, Y.K. Asia-Pac Financ Markets (2009) 16: 169. doi:10.1007/s10690-009-9091-7 Abstract
We analyze the counterparty risk for credit default swaps using the Markov chain model of portfolio credit risk of multiple obligors with interacting default intensity processes. The default correlation between the protection seller and underlying entity is modeled by an increment in default intensity upon the occurrence of an external shock event. The arrival of the shock event is a Cox process whose stochastic intensity is assumed to follow an affine diffusion process with jumps. We examine how the correlated default risks between the protection seller and the underlying entity may affect the credit default premium in a credit default swap.
Keywords Credit default swaps Counterparty risk Markov chain model Default correlation Download to read the full article text References
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