scholarly journals A BSDE with Delayed Generator Approach to Pricing under Counterparty Risk and Collateralization

2016 ◽  
Vol 2016 ◽  
pp. 1-11 ◽  
Author(s):  
Francesco Cordoni ◽  
Luca Di Persio
Keyword(s):  
Credit Risk ◽  
Viscosity Solution ◽  
Nonlinear Pricing ◽  
Counterparty Risk ◽  
System With Delay ◽  
Path Dependent

We consider a nonlinear pricing problem that takes into account credit risk and funding issues. The aforementioned problem is formulated as a stochastic forward-backward system with delay, both in the forward and in the backward component, whose solution is characterized in terms of viscosity solution to a suitable type of path-dependent PDE.

scholarly journals An Economic Examination of Collateralization in Different Financial Markets

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Risk Factors ◽  
Credit Risk ◽  
Financial Markets ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Theoretical Justification ◽  
Data Set ◽  
Unique Data ◽  
Economic Significance ◽  
The Difference

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.

scholarly journals Monotone schemes for fully nonlinear parabolic path dependent PDEs

2014 ◽  
Vol 01 (01) ◽  
pp. 1450005 ◽  
Author(s):  
Jianfeng Zhang ◽  
Jia Zhuo
Keyword(s):  
Rate Of Convergence ◽  
Viscosity Solution ◽  
Fully Nonlinear ◽  
Dependent Case ◽  
Seminal Work ◽  
Monotone Schemes ◽  
Monotone Scheme ◽  
Nonlinear Parabolic ◽  
Path Dependent ◽  
Case Based

In this paper, we extend the results of the seminal work Barles and Souganidis (1991) to path dependent case. Based on the viscosity theory of path dependent PDEs, developed by Ekren et al. (2012a, 2012b, 2014a and 2014b), we show that a monotone scheme converges to the unique viscosity solution of the (fully nonlinear) parabolic path dependent PDE. An example of such monotone scheme is proposed. Moreover, in the case that the solution is smooth enough, we obtain the rate of convergence of our scheme.

scholarly journals The Evolution of the Lead-lag Markets in the Price Discovery Process of the Sovereign Credit Risk: the Case of Italy

2021 ◽  
pp. 151-175
Author(s):  
Michele Anelli ◽  
Michele Patanè ◽  
Mario Toscano ◽  
Alessio Gioia
Keyword(s):  
Credit Risk ◽  
Price Discovery ◽  
Credit Default Swap ◽  
Government Bond ◽  
Counterparty Risk ◽  
Discovery Process ◽  
Sovereign Credit ◽  
Sovereign Credit Risk ◽  
The Government ◽  
Price Discovery Process

Abstract Hedging and speculative strategies play a key role in periods of financial market volatility particularly during economic crises. In such contexts, liquidity problems tend to evolve into potential credit risk events that amplifies the volatility of several markets such as the CDS and the government bond markets. The former, however, generally embodies a higher sensitivity to volatility due to the operators’ uncertainty about unstable and countercyclical counterparty risk. The aim of this paper is to analyze the long-lasting dynamic relationship between credit default swap (CDS) premia and government bond yield spreads (GBS), by focusing particularly on sovereign credit risk, in order to evaluate the lead-lag markets in the price discovery process against the backdrop of a deep financial crisis. The focus of this study concerns the country of Italy, one of the major European countries that suffers from both weak GDP growth and high public debt, which subjects it to volatility and speculation during periods of financial stress. JEL classification numbers: G01, G12, G14, G20. Keywords: CDS spreads, Government bond spreads, Credit risk, Cointegration, Vector error correction model, Granger-causality.

PRICING AND HEDGING OF PORTFOLIO CREDIT DERIVATIVES WITH INTERACTING DEFAULT INTENSITIES

2008 ◽  
Vol 11 (06) ◽  
pp. 611-634 ◽  
Author(s):  
RÜDIGER FREY ◽  
JOCHEN BACKHAUS
Keyword(s):  
Markov Process ◽  
Credit Risk ◽  
Credit Derivatives ◽  
Reduced Form ◽  
Counterparty Risk ◽  
Market Data ◽  
Portfolio Credit Risk ◽  
Default State ◽  
Default Contagion ◽  
Portfolio Credit Derivatives

We consider reduced-form models for portfolio credit risk with interacting default intensities. In this class of models default intensities are modeled as functions of time and of the default state of the entire portfolio, so that phenomena such as default contagion or counterparty risk can be modeled explicitly. In the present paper this class of models is analyzed by Markov process techniques. We study in detail the pricing and the hedging of portfolio-related credit derivatives such as basket default swaps and collaterized debt obligations (CDOs) and discuss the calibration to market data.

INFORMATIONALLY DYNAMIZED GAUSSIAN COPULA

2013 ◽  
Vol 16 (02) ◽  
pp. 1350008 ◽  
Author(s):  
S. CRÉPEY ◽  
M. JEANBLANC ◽  
D. WU
Keyword(s):  
Credit Risk ◽  
State Space ◽  
Cox Model ◽  
Credit Derivatives ◽  
Point Of View ◽  
Gaussian Copula ◽  
Copula Model ◽  
Counterparty Risk ◽  
Gaussian Distributions ◽  
Augmented State

In order to dynamize the static Gaussian copula model of portfolio credit risk, we introduce a model filtration made of a reference Brownian filtration progressively enlarged by the default times. This yields a multidimensional density model of default times, where, as opposed to the classical situation of the Cox model, the reference filtration is not immersed into the enlarged filtration. In mathematical terms this lack of immersion means that martingales in the reference filtration are not martingales in the enlarged filtration. From the point of view of financial interpretation this means default contagion, a good feature in the perspective of modeling counterparty wrong-way risk on credit derivatives. Computational tractability is ensured by invariance of multivariate Gaussian distributions through conditioning by some components, the ones corresponding to past defaults. Moreover the model is Markov in an augmented state-space including past default times. After a discussion of different notions of deltas, the model is applied to the valuation of counterparty risk on credit derivatives.

scholarly journals Pricing Financial Derivatives Subject to Multilateral Credit Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Credit Risk ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Financial Derivatives ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Credit Default ◽  
Default Swap

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.

scholarly journals An Economic Examination of Collateralization in Different Financial Markets

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Risk Factors ◽  
Credit Risk ◽  
Financial Markets ◽  
Counterparty Risk ◽  
Financial Contracts ◽  
Theoretical Justification ◽  
Data Set ◽  
Unique Data ◽  
Economic Significance ◽  
The Difference

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets.

Derivative Credit Risk (Counterparty Risk)

2017 ◽  
pp. 265-273
Author(s):  
Francisco Javier Población García
Keyword(s):  
Credit Risk ◽  
Counterparty Risk
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