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Semi-analytical Formula for Pricing Bilateral Counterparty Risk of CDS with Correlated Credit Risks

Semi-analytical Formula for Pricing Bilateral Counterparty Risk of CDS with Correlated Credit Risks Based on the framework of [7], we discuss pricing bilateral counterparty risk of CDS, where each individual default intensity is modeled by a shifted CIR process with jump (JCIR++), and the correlation between the default times is modeled by a copula function. We present a semi-analytical formula for pricing bilateral counterparty risk of CDS, which is more convenient to compute through calculating multiple numerical integration or using Monte-Carlo simulation without simulating default times. Moreover, we obtain simpler formulae under FGM copulas, Bernstein copulas and C A,B copulas, which can be applied for speeding up the computation and reducing the pricing error. Numerical results under FGM copulas and C A,B copulas show that our method performs better both in computation speed and accuracy. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Acta Mathematicae Applicatae Sinica Springer Journals

Semi-analytical Formula for Pricing Bilateral Counterparty Risk of CDS with Correlated Credit Risks

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Publisher
Springer Journals
Copyright
Copyright © 2018 by Institute of Applied Mathematics, Academy of Mathematics and System Sciences, Chinese Academy of Sciences and Springer-Verlag GmbH Germany, part of Springer Nature
Subject
Mathematics; Applications of Mathematics; Math Applications in Computer Science; Theoretical, Mathematical and Computational Physics
ISSN
0168-9673
eISSN
1618-3932
DOI
10.1007/s10255-018-0756-8
Publisher site
See Article on Publisher Site

Abstract

Based on the framework of [7], we discuss pricing bilateral counterparty risk of CDS, where each individual default intensity is modeled by a shifted CIR process with jump (JCIR++), and the correlation between the default times is modeled by a copula function. We present a semi-analytical formula for pricing bilateral counterparty risk of CDS, which is more convenient to compute through calculating multiple numerical integration or using Monte-Carlo simulation without simulating default times. Moreover, we obtain simpler formulae under FGM copulas, Bernstein copulas and C A,B copulas, which can be applied for speeding up the computation and reducing the pricing error. Numerical results under FGM copulas and C A,B copulas show that our method performs better both in computation speed and accuracy.

Journal

Acta Mathematicae Applicatae SinicaSpringer Journals

Published: Apr 26, 2018

References