Counterparty Risk and the Pricing of Defaultable Securities

46 Pages Posted: 1 Jan 2000

See all articles by Robert A. Jarrow

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: September 19, 1999

Abstract

Motivated by recent financial crises in East Asia and the U.S. 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.

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JEL Classification: G1

Suggested Citation

Jarrow, Robert A. and Yu, Fan, Counterparty Risk and the Pricing of Defaultable Securities (September 19, 1999). Available at SSRN: https://ssrn.com/abstract=183588 or http://dx.doi.org/10.2139/ssrn.183588

Robert A. Jarrow (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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