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2003•RePEc: Research Papers in EconomicsOpen access

Credit Derivatives in an Affine Framework

Li Chen, Damir Filipović

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Abstract

An efficient method for valuing credit derivatives based on three entities is developed in an affine framework. This includes interdependence of market and credit risk, joint credit migration and counterparty default risk of three firms. As an application we provide closed form expressions for the joint distribution of default times, default correlations, and default swap spreads in the presence of counterparty default risk. Key words: affine intensity based models, counterparty risk, credit derivatives, default dependence 1

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An efficient method for valuing credit derivatives based on three entities is developed in an affine framework. This includes interdependence of market and credit risk, joint credit migration and counterparty default risk of three firms. As an application we provide closed form expressions for the joint distribution of default times, default correlations, and default swap spreads in the presence of counterparty default risk. Key words: affine intensity based models, counterparty risk, credit derivatives, default dependence 1

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Available abstract

An efficient method for valuing credit derivatives based on three entities is developed in an affine framework. This includes interdependence of market and credit risk, joint credit migration and counterparty default risk of three firms. As an application we provide closed form expressions for the joint distribution of default times, default correlations, and default swap spreads in the presence of counterparty default risk. Key words: affine intensity based models, counterparty risk, credit derivatives, default dependence 1

Key concepts: Credit risk, Credit valuation adjustment, Credit derivative, Counterparty, Affine transformation, iTraxx, Credit default swap index, Business

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