Pricing Credit Default Swaps with the Intersection of Bilateral Counterparties, Rerence, and Market Risks

[[abstract]]本研究延伸 Jarrow and Yu (2001)、Jarrow and Trunbull (2000) 及 Kusuok (1999) 模型設定，並同時考量雙方交易對手風險、標的資產信用風險與即期利率與股價指數報酬率等市場風險交互影響下，本研究第一個貢獻是提供標的資產公司、保護買方與保護賣方零息債券公式解。在上述更符合交易實務之模型設定下，本研究第二個貢獻是提供信用違約交換之合理交換利率訂價。在數值分析方面，本研究首先探討 Jarrow and Yu (2001) 評價模型之不合理假設對於信用違約交換利率的影響。研究結果發現(1)其模型假設違約賠償費用為契約到期時支付，使信用違約交換利率明顯低估，且隨著契約期間的增長，低估情況更加嚴重。(2)忽略保護買方之信用風險使信用違約交換利率高估。此外，本研究亦發現忽略保護買方及保護賣方之違約風險受標的資產信用風險影響，將導致信用違約交換之利率高估。忽略市場風險對違約風險之影響，則可能使信用違約交換利率高估或低估。[[abstract]]In this paper, we extend the model setup of Jarrow and Yu (2001), Jarrow and Turnbull (2000), Kusuoka (1999) to derive the credit default swaps with the intersection of bilateral counterparties, reference and market risks. We first derive the pricing formulas for zero coupon bonds of reference entity, protection buyers, and protection sellers respectively. We also derive the suitable swap rate of credit default swap. From the section of numerical analyses, we compare our models with the model of Jarrow and Yu (2001) and find that (1) the assumption of “idealized default swap” underprices the swap rates of the credit default swaps. (2) the swap rates are underestimated without considering the default risk of protection buyer. Furthermore, we also demonstrate that the swap rates are underestimated without considering the default correlation between protection buyer (seller) and reference obligation. Meanwhile, without the consideration of the intersection of market and credit risks, the swap rates maybe be overpriced or underpriced