The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling

Tim Xiao

MPRA Paper from University Library of Munich, Germany

Abstract: This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some well-known risky valuation models in the markets can be viewed as special cases of this framework. We introduce the concept of comvariance (or comrelation) into the area of credit risk modeling to capture the default relationship among three or more parties. Accounting for default correlations and comrelations becomes important, especially during the credit crisis. Moreover, we find that collateralization works well for financial instruments subject to bilateral credit risk, but fails for ones subject to multilateral credit risk.

Keywords: asset pricing; credit risk modeling; unilateral, bilateral, multilateral credit risk; collateralization; comvariance; comrelation; correlation. (search for similar items in EconPapers)
JEL-codes: E44 G12 G21 G33 (search for similar items in EconPapers)
Date: 2013-05-01
New Economics Papers: this item is included in nep-ban, nep-mac and nep-rmg
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https://mpra.ub.uni-muenchen.de/47136/1/MPRA_paper_47136.pdf original version (application/pdf)

Related works:
Working Paper: The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling (2019)
Working Paper: The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling (2019)
Working Paper: The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling (2017)
Working Paper: The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling (2017)
Working Paper: The Impact of Default Dependency and Collateralization on Asset Pricing and Credit Risk Modeling (2017)
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