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Credit Default Swap Valuation Adjusted By Counterparty Risk

Posted on:2016-04-08Degree:DoctorType:Dissertation
Country:ChinaCandidate:G Q HuFull Text:PDF
GTID:1109330479489535Subject:Finance
Abstract/Summary:PDF Full Text Request
Subprime mortgage crisis pushed Credit Default Swaps(CDS) to where the wind and waves are highest. With well-established CDS counterparties appearing a series of Credit event, a core problem was exposed: the crucial CDS valuation mechanism has significant flaw, it ignored the counterparty risk. From the microscopic perspective of asset pricing, this paper relaxes the perfect credit hypothesis, studies the CDS valuation adjustment by counterparty risk basing on "System Credit Event Analysis Framework".Firstly, theoretically analyze the importance of counterparty risk for the valuation of CDS; Given the associated default the enormous harm, further expound counterparty risk and its measurement method; After combing the CDS valuations modeling theory, find that its theory research can be classified into three stages.Secondly, on the basis of analyzing CDS valuation mechanism, using System Credit Events, this paper puts forward the valuation idea of "System Credit Event Analysis Framework", which is accord with No-Arbitrage Pricing Theory. In this methodology, a set of independent and complete credit event group should be defined, which form a complete risk system, then study the CDS valuations using survival analysis technology.Thirdly, gradually relax the seller and the buyer’s perfect credit hypothesis, respectively study unilateral counterparty risk and bilateral counterparty risk impact on CDS valuations. To better solve the peak, fat tail and the infinite variance problem caused by the extreme variation, we use t-copula function to measure default correlation among participants, use "tail-related measure" technology to measure the correlation coefficient, and test the valuation model through the numerical simulation. Research shows that: when relaxing the credit perfect hypothesis of sellers, unilateral counterparty risk have a significant impact on CDS valuations, and the default correlation between reference assets and sellers is very important for the effect; When relaxing the perfect credit hypothesis of both CDS seller’s and buyer, the adjustment of bilateral counterparty risk makes CDS valuation more accurate. Moreover, the re-placement cost and the credit spreads of reference assets is also particularly important in CDS valuation.Finally, through summarizing the full research, combining with the experience and lessons at home and abroad, and the reality development situation of the credit derivatives market of China, puts forward three policy Suggestions: improve the CDS valuation mechanism; prevent the risk of associated default; and strengthen the construction of supervision system.
Keywords/Search Tags:Credit Default Swap, Counterparty Risk, Associated Default, System Credit Events
PDF Full Text Request
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