The valuation of multi-counterparties CDS with credit rating migration

In this paper, the pricing of a Credit Default Swap (CDS) contract with multiple counterparties is considered. The pricing model takes into account the credit rating migration risk of the reference. It is a new model established under the reduced form framework, where the intensity rates are assumed...

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Bibliographic Details
Published inApplied Mathematics-A Journal of Chinese Universities Vol. 35; no. 4; pp. 379 - 391
Main Authors Li, Wen-yi, Guo, Hua-ying, Liang, Jin, Brahim, Anis Ben
Format Journal Article
LanguageEnglish
Published Hangzhou Editorial Committee of Applied Mathematics - A Journal of Chinese Universities 01.10.2020
Subjects
Applications of Mathematics
Mathematics
Mathematics and Statistics
91G40
CDS
multi-counterparties
reduced form
credit rating migration risk
structure style
35K55
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Summary:In this paper, the pricing of a Credit Default Swap (CDS) contract with multiple counterparties is considered. The pricing model takes into account the credit rating migration risk of the reference. It is a new model established under the reduced form framework, where the intensity rates are assumed to have structural styles. We derive from it a non-linear partial differential equation system where both positive and negative correlations of counterparties and the references are considered via a single factor model. Then, an ADI (Alternating Direction Implicit) difference method is used to solve the partial differential equations by iteration. From the numerical results, the comparison of multi-counterparty CDS contract and the standard one are analyzed respectively. Moreover, the impact of default parameters on value of the contracts are discussed.
ISSN:1005-1031
1993-0445
DOI:10.1007/s11766-020-3503-4