Counterparty Credit Risk Framework

This article presents a framework for capturing counterparty credit risk by accounting default correlation. We find that the CDS premium and the default correlations/comrelation have a negative relation. Intuitively, a protection seller who is positively correlated with the reference entity, i.e., a wrong way risk, should charge a lower premium for selling credit protection. Next, we also find that the impacts of the default correlations and comrelation are approximately linear. Finally, our study shows that the sensitivity slopes of the CDS premium to the default correlations and comrelation are negative. Slope measures the rate of change in the premium as a result of a change in the default dependence.https://www.infona.pl/resource/bwmeta1.element.ID-74f411a6-60e2-4995-bc63-06d17c24ba27/tab/reference