Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/201542 
Authors: 
Year of Publication: 
2019
Publisher: 
ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg
Abstract: 
This article presents a comprehensive framework for valuing financial instruments subject to credit risk. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats in financial markets. We analyze how swap rates are affected by bilateral counterparty credit risk, and how CDS spreads depend on the trilateral credit risk of the buyer, seller, and reference entity in a contract. Moreover, we study the effect of collateralization on valuation, since the majority of OTC derivatives are collateralized. The model shows that a fully collateralized swap is risk-free, whereas a fully collateralized CDS is not equivalent to a risk-free one.
Subjects: 
asset pricing
credit risk modeling
unilateral
bilateral
multilateral credit risk
collateralization
comvariance
comrelation
correlation
Document Type: 
Working Paper

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