Frey, Rüdiger and Rösler, Lars
Contagion Effects and Collateralized Credit Value Adjustments for Credit Default Swaps.
Research Report Series / Department of Statistics and Mathematics, 122.
WU Vienna University of Economics and Business, Vienna.
The paper is concerned with counterparty credit risk
management for credit default swaps in the presence of default contagion. In particular, we study the impact of default contagion on credit value adjustments such as the BCCVA (Bilateral Collateralized Credit Value Adjustment) of Brigo et al. 2012 and on the performance of various collateralization strategies. We use the incomplete-information model of Frey and Schmidt (2012) as vehicle for our analysis. We find that taking contagion effects into account is important for the effectiveness of the
strategy and we derive refined collateralization strategies to account for contagion effects. (authors' abstract)