Counterparty Risk for Credit Default Swaps: Impact of Spread Volatility and Default Correlation

2008 ◽  
Author(s):  
Damiano Brigo ◽  
Kyriakos Chourdakis
Keyword(s):  
Credit Default Swaps ◽  
Counterparty Risk ◽  
Default Correlation ◽  
Credit Default

PRICING COUNTERPARTY RISK INCLUDING COLLATERALIZATION, NETTING RULES, RE-HYPOTHECATION AND WRONG-WAY RISK

2013 ◽  
Vol 16 (02) ◽  
pp. 1350007 ◽  
Author(s):  
DAMIANO BRIGO ◽  
AGOSTINO CAPPONI ◽  
ANDREA PALLAVICINI ◽  
VASILEIOS PAPATHEODOROU
Keyword(s):  
Interest Rate ◽  
Credit Derivatives ◽  
Credit Default Swaps ◽  
Credit Spread ◽  
Counterparty Risk ◽  
Default Correlation ◽  
Dynamical Models ◽  
Credit Default ◽  
The Impact

This article is concerned with the arbitrage-free valuation of bilateral counterparty risk through stochastic dynamical models when collateral is included, with possible rehypothecation. The payout of claims is modified to account for collateral margining in agreement with International Swap and Derivatives Association (ISDA) documentation. The analysis is specialized to interest-rate and credit derivatives. In particular, credit default swaps are considered to show that a perfect collateralization cannot be achieved under default correlation. Interest rate and credit spread volatilities are fully accounted for, as is the impact of re-hypothecation, collateral margining frequency, and dependencies.

COUNTERPARTY RISK FOR CREDIT DEFAULT SWAPS: IMPACT OF SPREAD VOLATILITY AND DEFAULT CORRELATION

2009 ◽  
Vol 12 (07) ◽  
pp. 1007-1026 ◽  
Author(s):  
DAMIANO BRIGO ◽  
KYRIAKOS CHOURDAKIS
Keyword(s):  
Copula Function ◽  
Credit Default Swaps ◽  
Credit Spread ◽  
Counterparty Risk ◽  
Default Correlation ◽  
Numerical Examples ◽  
Stochastic Intensity ◽  
Credit Default ◽  
Credit Valuation Adjustment ◽  
Theoretical Equivalence

We consider counterparty risk for Credit Default Swaps (CDS) in presence of correlation between default of the counterparty and default of the CDS reference credit. Our approach is innovative in that, besides default correlation, which was taken into account in earlier approaches, we also model credit spread volatility. Stochastic intensity models are adopted for the default events, and defaults are connected through a copula function. We find that both default correlation and credit spread volatility have a relevant impact on the positive counterparty-risk credit valuation adjustment to be subtracted from the counterparty-risk free price. We analyze the pattern of such impacts as correlation and volatility change through some fundamental numerical examples, analyzing wrong-way risk in particular. Given the theoretical equivalence of the credit valuation adjustment with a contingent CDS, we are also proposing a methodology for valuation of contingent CDS on CDS.

scholarly journals Credit Default Swaps and the Credit Crisis

2010 ◽  
Vol 24 (1) ◽  
pp. 73-92 ◽  
Author(s):  
René M Stulz
Keyword(s):  
Social Welfare ◽  
Credit Default Swaps ◽  
Counterparty Risk ◽  
Credit Crisis ◽  
Over The Counter ◽  
Bilateral Contracts ◽  
Financial Strength ◽  
The Social ◽  
Credit Default

Many observers have argued that credit default swaps contributed significantly to the credit crisis. Of particular concern to these observers are that credit default swaps trade in the largely unregulated over-the-counter market as bilateral contracts involving counterparty risk and that they facilitate speculation involving negative views of a firm's financial strength. Some observers have suggested that credit default swaps would not have made the crisis worse had they traded on exchanges. I conclude that credit default swaps did not cause the dramatic events of the credit crisis, that the over-the-counter credit default swaps market worked well during much of the crisis, and that exchange trading has both advantages and costs compared to over-the-counter trading. Though I argue that eliminating over-the-counter trading of credit default swaps could reduce social welfare, I also recognize that much research is needed to understand better and to quantify the social gains and costs of derivatives in general and credit default swaps in particular.

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