학회소식
[2013년 제 4차] The Relation Between Counter-Party Default and Inte
작성자 : 관리자
조회수 : 875
게시일 :
2013-12-16
We present a unified framework to study the impact of the correlation between interest rate volatility and counter-party default probability on the credit risk of collateralized interest rate derivatives contracts. When interest rates are volatile, counter-parties are potentially more likely to default. Large moves in interest rates accompanied with counter-party default may lead to losses on interest rate derivatives even if they are collateralized. An interest rate model with stochastic volatility and a reduced-form default model, in which the default probability is correlated with interest rate volatility, are proposed and estimated from market data. Finally, we analyze the impact of the correlation between interest rate volatility and a counterparty's default probability on the credit risk of collateralized interest rate derivatives contracts. Our result shows that ignoring this correlation under-estimates the credit risk even with collateralized trades.
