Credit default swap valuation with counterparty default risk and market risk

2004 ◽  
Vol 6 (2) ◽  
pp. 49-80 ◽  
Author(s):  
Mi Ae Kim ◽  
Tong Suk Kim
Keyword(s):  
Default Risk ◽  
Credit Default Swap ◽  
Market Risk ◽  
Credit Default ◽  
Default Swap

scholarly journals The Determinants of Credit Default Swap Premia

2009 ◽  
Vol 44 (1) ◽  
pp. 109-132 ◽  
Author(s):  
Jan Ericsson ◽  
Kris Jacobs ◽  
Rodolfo Oviedo
Keyword(s):  
Default Risk ◽  
Common Factor ◽  
Explanatory Power ◽  
Empirical Work ◽  
Credit Default Swap ◽  
Principal Component ◽  
Corporate Bond ◽  
Credit Default ◽  
Default Swap ◽  
Swap Spreads

AbstractVariables that in theory determine credit spreads have limited explanatory power in existing empirical work on corporate bond data. We investigate the linear relationship between theoretical determinants of default risk and default swap spreads. We find that estimated coefficients for a minimal set of theoretical determinants of default risk are consistent with theory and are significant statistically and economically. Volatility and leverage have substantial explanatory power in univariate and multivariate regressions. A principal component analysis of residuals and spreads indicates limited evidence for a residual common factor, confirming that the theoretical variables explain a significant amount of the variation in the data.

scholarly journals The Impact of Earnings on the Pricing of Credit Default Swaps

2009 ◽  
Vol 84 (5) ◽  
pp. 1363-1394 ◽  
Author(s):  
Jeffrey L. Callen ◽  
Joshua Livnat ◽  
Dan Segal
Keyword(s):  
Default Risk ◽  
Credit Default Swap ◽  
Credit Default Swaps ◽  
Cash Flows ◽  
Earnings Surprises ◽  
Credit Default ◽  
Percent Increase ◽  
Default Swap ◽  
Highly Correlated ◽  
The Impact

ABSTRACT: This study evaluates the impact of earnings on credit risk in the Credit Default Swap (CDS) market using levels, changes, and event study analyses. We find that earnings (cash flows, accruals) of reference firms are negatively and significantly correlated with the level of CDS premia, consistent with earnings (cash flows, accruals) conveying information about default risk. Based on the changes analysis, a 1 percent increase in ROA decreases CDS rates significantly by about 5 percent. We also find that (1) CDS premia are more highly correlated with below-median earnings than with above-median earnings and (2) CDS premia are more highly correlated with earnings of low-rated firms than with earnings of high-rated firms. Evidence indicates further that short-window earnings surprises are negatively and significantly correlated with CDS premia changes in the three-day window surrounding the preliminary earnings announcement, although the impact is concentrated in the shorter maturities.

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 Valuation of Credit Default Swap with Counterparty Default Risk by Structural Model

2011 ◽  
Vol 02 (01) ◽  
pp. 106-117
Author(s):  
Jin Liang ◽  
Peng Zhou ◽  
Yujing Zhou ◽  
Junmei Ma
Keyword(s):  
Default Risk ◽  
Structural Model ◽  
Credit Default Swap ◽  
Credit Default ◽  
Default Swap

scholarly journals Separating the Components of Default Risk: A Derivative-Based Approach

2015 ◽  
Vol 05 (01) ◽  
pp. 1550005 ◽  
Author(s):  
Anh Le
Keyword(s):  
Default Risk ◽  
Credit Default Swap ◽  
Loss Given Default ◽  
Positive Correlation ◽  
Credit Default ◽  
Risk Neutral ◽  
Default Swap ◽  
Using Data ◽  
Pricing Framework

In this paper, I propose a general pricing framework that allows the risk neutral dynamics of loss given default (Lℚ) and default probabilities (λℚ) to be separately and sequentially discovered. The key is to exploit the differentials in Lℚ exhibited by different securities on the same underlying firm. By using equity and option data, I show that one can efficiently extract pure measures of λℚ that are not contaminated by recovery information. Equipped with this knowledge of pure default dynamics, prices of any defaultable security on the same firm with non-zero recovery can be inverted to compute the associated Lℚ corresponding to that particular security. Using data on credit default swap premiums, I show that, cross-sectionally, λℚ and Lℚ are positively correlated. In particular, this positive correlation is strongly driven by firms' characteristics, including leverage, volatility, profitability and q-ratio. For example, 1% increase in leverage leads to 0.14% increase in λℚ and 0.60% increase in Lℚ.

scholarly journals The Valuation of Credit Default Swap with Counterparty Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Counterparty Risk ◽  
New Model ◽  
Credit Risks ◽  
Credit Default ◽  
Default Swap ◽  
Default Dependency

This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks 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 The Valuation of Credit Default Swap with Counterparty Risk and Collateralization

2019 ◽  
Author(s):  
Tim Xiao
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Default Risk ◽  
Credit Default Swap ◽  
Counterparty Risk ◽  
New Model ◽  
Credit Risks ◽  
Credit Default ◽  
Default Swap ◽  
Default Dependency

This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks 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.

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