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- Title
Counterparty Risk and the Pricing of Defaultable Securities.
- Authors
Jarrow, Robert A.; Yu, Fan
- Abstract
Motivated by recent financial crises in East Asia and the United States where the downfall of a small number of firms had an economy-wide impact, this paper generalizes existing reduced-form models to include default intensities dependent on the default of a counterparty. In this model, firms have correlated defaults due not only to an exposure to common risk factors, but also to firm-specific risks that are termed "counterparty risks." Numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps.
- Subjects
BOND prices; SECURITIES; RISK; FINANCIAL crises; PRICING; CREDIT derivatives; DEFAULT (Finance); INVESTMENTS; FINANCIAL instruments; BUSINESS failures; SWAPS (Finance); DERIVATIVE securities
- Publication
Journal of Finance (Wiley-Blackwell), 2001, Vol 56, Issue 5, p1765
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/0022-1082.00389