Asia-Pacific Financial Markets

, Volume 16, Issue 3, pp 169-181

First online:

Counterparty Risk for Credit Default Swaps: Markov Chain Interacting Intensities Model with Stochastic Intensity

  • Kwai Sun LeungAffiliated withDepartment of Systems Engineering and Engineering Management, Chinese University of Hong Kong
  • , Yue Kuen KwokAffiliated withDepartment of Mathematics, Hong Kong University of Science and Technology Email author 

Rent the article at a discount

Rent now

* Final gross prices may vary according to local VAT.

Get Access


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.


Credit default swaps Counterparty risk Markov chain model Default correlation