Bao, Qunfang and Chen, Si and Liu, Guimei and Li, Shenghong (2010): Unilateral CVA for CDS in Contagion model: With volatilities and correlation of spread and interest.

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Abstract
The price of financial derivative with unilateral counterparty credit risk can be expressed as the price of an otherwise riskfree derivative minus a credit value adjustment(CVA) component that can be seen as shorting a call option, which is exercised upon default of counterparty, on MtM of the derivative. Therefore, modeling volatility of MtM and default time of counterparty is key to quantification of counterparty risk. This paper models default times of counterparty and reference with a particular contagion model with stochastic intensities that is proposed by Bao et al. 2010. Stochastic interest rate is incorporated as well to account for positive correlation between spread and interest. Survival measure approach is adopted to calculate MtM of riskfree CDS and conditional survival probability of counterparty in defaultable environment. Semianalytical solution for CVA is attained. Affine specification of intensities and interest rate concludes analytical expression for predefault value of MtM. Numerical experiments at the last of this paper analyze the impact of contagion, volatility and correlation on CVA.
Item Type:  MPRA Paper 

Original Title:  Unilateral CVA for CDS in Contagion model: With volatilities and correlation of spread and interest 
Language:  English 
Keywords:  Credit Value Adjustment, Contagion Model, Stochastic Intensities and Interest, Survival Measure, Aﬃne Speciﬁcation 
Subjects:  G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63  Computational Techniques ; Simulation Modeling C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C15  Statistical Simulation Methods: General G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  28250 
Depositing User:  Dr. Qunfang Bao 
Date Deposited:  19. Jan 2011 20:54 
Last Modified:  24. Apr 2015 05:24 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/28250 