2012•RePEc: Research Papers in EconomicsOpen access

A structural approach to pricing credit default swaps with credit and debt value adjustments

Alexander Lipton, Ioana Savescu

Abstract

A multi-dimensional extension of the structural default model with firms' values driven by diffusion processes with Marshall-Olkin-inspired correlation structure is presented. Semi-analytical methods for solving the forward calibration problem and backward pricing problem in three dimensions are developed. The model is used to analyze bilateral counterparty risk for credit default swaps and evaluate the corresponding credit and debt value adjustments.

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Key concepts: Collateralized debt obligation, Credit derivative, Credit default swap, iTraxx, Credit default swap index, Credit risk, Counterparty, Business