Pricing credit default swaps with bilateral counterparty risk in a reduced form model with Markov regime switching

2014 ◽  
Vol 230 ◽  
pp. 290-302 ◽  
Author(s):  
Xue Liang ◽  
Guojing Wang ◽  
Hong Li
Keyword(s):  
Regime Switching ◽  
Credit Default Swaps ◽  
Reduced Form ◽  
Counterparty Risk ◽  
Markov Regime Switching ◽  
Credit Default ◽  
Form Model ◽  
Reduced Form Model

COUNTERPARTY RISK FOR CREDIT DEFAULT SWAP WITH STATES RELATED DEFAULT INTENSITY PROCESSES

2011 ◽  
Vol 14 (08) ◽  
pp. 1335-1353 ◽  
Author(s):  
DAN TANG ◽  
YONGJIN WANG ◽  
YUZHEN ZHOU
Keyword(s):  
Markov Chains ◽  
Credit Default Swap ◽  
Reduced Form ◽  
Counterparty Risk ◽  
Default Correlation ◽  
Default Intensity ◽  
Credit Default ◽  
Form Model ◽  
Default Swap ◽  
Set Up

In this paper, the counterparty risk is considered in pricing a Credit Default Swap (abbr. CDS). We adopt an intensity-based reduced form model, in which the default intensity processes of the counterpart and the reference credit are modulated by the credit states of the firms. Two Markov chains are used to describe the credit state processes. We set up a model where the default correlation between the counterpart and the reference is described through the Markov chains. A semi-explicit formula for the pricing of CDS with counterparty risk is obtained. We analyze the impacts of default correlations and the state changes on the CDS price through some numerical experiments.

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