Credit Default Swap Calibration and Equity Swap Valuation Under Counterparty Risk With a Tractable Structural Model

Topics:
Investment and Capital Markets
Tags:
Damiano Brigo,
Strategy,
Pricing Strategy,
Pricing,
Model,
Marketing Research,
Marketing,
Management,
Investment,
Financial Services,
...
Source:
Damiano Brigo

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Overview: Modelling firms default is becoming important, especially in recent times where the market is experiencing a large development in credit derivatives trading. This paper develops a tractable structural model with analytical default probabilities depending on some dynamics parameters, and shows how to calibrate the model using a chosen number of Credit Default Swap (CDS) market quotes. Finally it provides a typical example of a case where the calibrated structural model can be used for credit pricing in a much more convenient way than a calibrated reduced form model: The pricing of counterparty risk in an equity swap.

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Format: PDF | Size: 310KB | Date: Aug 2004 | Pages: 24

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