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1、ValuationandHedgingofCDSCounterpartyExposureinaMarkovCopulaModelT.R.Bielecki1;S.Crepey2;4;yM.Jeanblanc2;3;4;yB.Zargari2;51IllinoisInstituteofTechnology,2Universited'EvryVald'Essonne,3EuroplaceInstituteofFinance,4CRISConsortium,5SharifUniversityofT
2、echnology.July15,2010TheauthorsthankS.AssefaandJ.-P.Lardyforinterestingdiscussionsduringthepreparationofthisarticle.AbstractAMarkovmodelisconstructedforstudyingthecounterpartyriskinaCDScontract.The`wrongwayrisk'inthismodelisaccountedforbythepossibili
3、tyofthecommondefaultofthereferencenameandofthecounterparty.Adynamiccopulapropertyaswellasanemodelspeci cationsmakepricingandcalibrationveryecient.WealsoconsidertheissueofdynamicallyhedgingtheCVAwitharollingCDSwrittenonthecounterparty.Numericalresul
4、tsarepresentedtoshowtheadequacyofthebehaviorofCVAinthemodelwithstylizedfeatures.Keywords:CounterpartyCreditRisk,CDS,CVA,WrongWayRisk,DynamicHedg-ing.1IntroductionThesub-primecrisishashighlightedtheimportanceofcounterpartyriskinOTCderivativemarkets,pa
5、rticularlyinthecaseofcreditderivatives.WeconsiderinthispaperthecaseofaCreditDefaultSwapwithcounterpartyrisk.Thistopic,whichcorrespondstotheemblematiccaseofCDSsbetweenLehmanandAIG,alreadyreceivedalotofattentioninTheresearchofT.R.Bieleckiwassupportedb
6、yNSFGrantDMS{0604789andNSFGrantDMS{0908099.yTheresearchofthisauthorbene tedfromthesupportoftheDGE.2CDSwithcounterpartyrisktheliterature.Itcanthusbeconsideredasabenchmarkproblemofcounterpartycreditrisk.Therehasbeenalotofresearchactivityintherecentyear
7、sdevotedtovaluationofcounter-partyrisk.Toquotebutafewreferences:HugeandLando[21]proposearating-basedapproach,HullandWhite[20]studythisproblemintheset-upofastaticcopulamodel,JarrowandYu[22]useanintensitycontagionmodel,furtherconsideredinLeungandKwo
8、k[26],BrigoandChourdakis[11]workintheset-upoftheirGaussiancopulaandCIR++inten-sitymodel,extendedtotheissueofbilateralcounterpartycreditriskinBrigoandCapponi[10],Blanchet-ScallietandPatras[8]orLiptonandSepp[25]developstructuralapproaches,SteinandLe
