Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/202075 
Authors: 
Year of Publication: 
2018
Publisher: 
ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg
Abstract: 
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.
Subjects: 
asset pricing
credit risk modeling
collateralization
comvariance
comrelation
correlation
CDS
JEL: 
E44
G21
G12
G24
G32
G33
G18
G28
Document Type: 
Working Paper

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