Contagion Effects And Collateralized Credit Value Adjustments For Credit Default Swaps

Rüdiger Frey, Lars Rösler

Publication: Scientific journalJournal articlepeer-review

Abstract

The paper is concerned with counterparty credit risk for credit default swaps in the presence of default contagion. In particular, we study the impact of default contagion on credit value adjustments such as the Bilateral Collateralized Credit Value Adjustment (BCCVA) of Brigo et al. (2014) and on the performance of various collateralization strategies. We use the incomplete-information model of Frey & Schmidt (2012) for our analysis. We find that contagion effects have a substantial impact on the effectiveness of popular collateralization strategies. We go on and derive improved collateralization strategies that account for contagion. Theoretical results are complemented by a simulation study.
Original languageEnglish
JournalInternational Journal of Theoretical and Applied Finance
Volume17
Issue number7
DOIs
Publication statusPublished - 2014

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