Numerical analysis of an extended structural default model with mutual liabilities and jump risk
Computational Finance
2017-01-03 v1
Abstract
We consider a structural default model in an interconnected banking network as in Lipton [International Journal of Theoretical and Applied Finance, 19(6), 2016], with mutual obligations between each pair of banks. We analyse the model numerically for two banks with jumps in their asset value processes. Specifically, we develop a finite difference method for the resulting two-dimensional partial integro-differential equation, and study its stability and consistency. We then compute joint and marginal survival probabilities, as well as prices of credit default swaps (CDS), first-to-default swaps (FTD), credit and debt value adjustments (CVA and DVA). Finally, we calibrate the model to market data and assess the impact of jump risk.
Keywords
Cite
@article{arxiv.1701.00030,
title = {Numerical analysis of an extended structural default model with mutual liabilities and jump risk},
author = {Vadim Kaushansky and Alexander Lipton and Christoph Reisinger},
journal= {arXiv preprint arXiv:1701.00030},
year = {2017}
}