Unilateral counterparty risk valuation of CDS using a regime-switching intensity model |
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Institution: | 1. Southampton Business School, University of Southampton, United Kingdom;2. Electronics and Computer Science, University of Southampton, United Kingdom |
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Abstract: | We consider the unilateral credit valuation adjustment (CVA) of a credit default swap (CDS) under a contagion model with regime-switching interacting intensities. The model assumes that the interest rate, the recovery, and the default intensities of the protection seller and the reference entity are all influenced by macro-economy described by a homogeneous Markov chain. By using the idea of “change of measure” and some formulas for the Laplace transforms of the integrated intensity processes, we derive the semi-analytical formulas for the joint distribution of the default times and the unilateral CVA of a CDS. |
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Keywords: | Credit default swaps Counterparty risk Credit valuation adjustment Interacting intensities Regime-switching |
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