Counterparty Risk and the Pricing of Defaultable Securities

by Robert A. Jarrow of Cornell University, and
Fan Yu of University of California at Irvine

October 2001

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 to not only 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.

Books Referenced in this Paper:  (what is this?)

Download paper (628K PDF) 44 pages

Published in: Journal of Finance, Vol. 56, No. 5, (October 2001), pp. 1765-1799.

[Home] [Credit Pricing Papers]

[ Home ] [ Up ]

Please contact me with problems or suggestions.
Copyright © 2000-2008 DefaultRisk.com
Last modified: August 27, 2008