Asia-Pacific Financial Markets

, 16:169

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

Authors

  • Kwai Sun Leung
    • Department of Systems Engineering and Engineering ManagementChinese University of Hong Kong
    • Department of MathematicsHong Kong University of Science and Technology
Article

DOI: 10.1007/s10690-009-9091-7

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 swapsCounterparty riskMarkov chain modelDefault correlation
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Copyright information

© Springer Science+Business Media, LLC. 2009