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Applied Mathematics-A Journal of Chinese Universities  2021, Vol. 36 Issue (1): 31-50    
    
Counterparty risk valuation on credit-linked notes under a Markov Chain framework
JIANG Ting-ting1,2,3 QIAN Xiao-song1,4,∗ George Xian-zhi Yuan1,5,6,7
1Center for Financial Engineering, Soochow University, Suzhou 215006, China.
2Postdoctoral Scientific Research Station, Xiamen International Bank, Xiamen 361000, China.
3School of Management, Xiamen University, Xiamen 361000, China.
4School of Mathematical Sciences, Soochow University, Suzhou 215006, China. 5Business
School, Chengdu University, Chengdu 610106, China.
6Shanghai Lixin University of Accounting and Finance, Shanghai 201620, China.
7Business School, Sun Yat-Sen University, Guangzhou 510275, China.
Counterparty risk valuation on credit-linked notes under a Markov Chain framework
JIANG Ting-ting1,2,3 QIAN Xiao-song1,4,? George Xian-zhi Yuan1,5,6,7
1Center for Financial Engineering, Soochow University, Suzhou 215006, China.
2Postdoctoral Scientific Research Station, Xiamen International Bank, Xiamen 361000, China.
3School of Management, Xiamen University, Xiamen 361000, China.
4School of Mathematical Sciences, Soochow University, Suzhou 215006, China. 5Business
School, Chengdu University, Chengdu 610106, China.
6Shanghai Lixin University of Accounting and Finance, Shanghai 201620, China.
7Business School, Sun Yat-Sen University, Guangzhou 510275, China.
 全文: PDF 
摘要： A credit-linked note (CLN) is a note paying an enhanced coupon to investors for
bearing the credit risk of a reference entity. In this paper, we study the counterparty risk on
CLNs under a Markov chain framework, and introduce a Markov copula model to describe joint
defaults between the reference entity underlying the CLN and CLN issuer. Assuming that the
respective default intensities are directly and inversely proportional to the interest rate, which
follows a CIR process, we obtain the explicit formulae for CLN values through a PDE approach.
Finally, credit valuation adjustment (CVA) formula is derived to price counterparty credit risk.
关键词： credit-linked notes(CLNs);  Markov copula;  PDE;  CVA    
Abstract: A credit-linked note (CLN) is a note paying an enhanced coupon to investors for
bearing the credit risk of a reference entity. In this paper, we study the counterparty risk on
CLNs under a Markov chain framework, and introduce a Markov copula model to describe joint
defaults between the reference entity underlying the CLN and CLN issuer. Assuming that the
respective default intensities are directly and inversely proportional to the interest rate, which
follows a CIR process, we obtain the explicit formulae for CLN values through a PDE approach.
Finally, credit valuation adjustment (CVA) formula is derived to price counterparty credit risk.
Key words: credit-linked notes(CLNs)    Markov copula    PDE    CVA
出版日期: 2021-03-17
CLC:  91G40  
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JIANG Ting-ting
QIAN Xiao-song
George Xian-zhi Yuan

引用本文:

JIANG Ting-ting, QIAN Xiao-song, George Xian-zhi Yuan, . Counterparty risk valuation on credit-linked notes under a Markov Chain framework[J]. Applied Mathematics-A Journal of Chinese Universities, 2021, 36(1): 31-50.

JIANG Ting-ting, QIAN Xiao-song, ? George Xian-zhi Yuan, . Counterparty risk valuation on credit-linked notes under a Markov Chain framework. Applied Mathematics-A Journal of Chinese Universities, 2021, 36(1): 31-50.

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http://www.zjujournals.com/amjcub/CN/    或    http://www.zjujournals.com/amjcub/CN/Y2021/V36/I1/31

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