Journal of Applied Mathematics

Credit Risky Securities Valuation under a Contagion Model with Interacting Intensities

Anjiao Wang and Zhongxing Ye

Full-text: Open access

Abstract

We study a three-firm contagion model with counterparty risk and apply this model to price defaultable bonds and credit default swap (CDS). This model assumes that default intensities are driven by external common factors as well as other defaults in the system. Using the “total hazard” approach, default times can be generated and the joint density function is obtained. We represent the pricing method of defaultable bonds and obtain the closed-form pricing formulas. By the approach of “change of measure,” analytical solutions of CDS swap rate (swap premuim) are derived in the continuous time framework and the discrete time framework, respectively.

Article information

Source
J. Appl. Math., Volume 2011 (2011), Article ID 158020, 20 pages.

Dates
First available in Project Euclid: 15 March 2012

Permanent link to this document
https://projecteuclid.org/euclid.jam/1331818626

Digital Object Identifier
doi:10.1155/2011/158020

Mathematical Reviews number (MathSciNet)
MR2824918

Zentralblatt MATH identifier
1223.91039

Citation

Wang, Anjiao; Ye, Zhongxing. Credit Risky Securities Valuation under a Contagion Model with Interacting Intensities. J. Appl. Math. 2011 (2011), Article ID 158020, 20 pages. doi:10.1155/2011/158020. https://projecteuclid.org/euclid.jam/1331818626


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