Bilateral Risk Valuation of Credit Default Swap Contracts: Under multivariate Variance Gamma Process with flexible dependence structure

Document Type : Original Article

Authors
akbar abbasifard 1
maryam khaliliaraghi 2
Mir Feiz FalahShams 3
1 Student of finance, banking major, department of financial management, faculty of management and economics, Science and Research Branch, Islamic Azad University, Tehran, Iran.
2 Assistant Professor, Department of Financial Management, Faculty of Management and Economics, Science and Research Branch, Islamic Azad University, Tehran, Iran.
3 Associate Professor, Department of Finance, Faculty of Management, Center Tehran Branch, Islamic Azad University, Tehran, Iran.
10.30495/jik.2024.71018.4170
Abstract
Financial markets have always been subject to the impact of incoming news and react to it according to investor's expectations. Here we develop a quantitative extension of Merton's structural model to capture the impact of news on the credit worthiness of Banks affected by them. Dynamic asset selection and particularly dependence modeling multi-asset plays a critical role in structural model. Multidimensional levy processes has many used in the recent years to model the joint dynamics of multiple financial assets. Some models extend one dimensional VG process to multidimensional with a assumption about common time change for each marginal process, which implies limited dependence structure and similar kurtosis on each margin so we use a new multivariate variance gamma process which allows arbitrary marginal VG processes with flexible dependence structure and this multidimensional Levy process is easy to simulate and estimate. Also we have introduced a multidimensional partial integro-differential equations (PIDE) for default and Credit Default Swap problem Caused by interconnected banking system with mutual liabilities of the structural credit risk model with multivariate VG Process to achieve a new technique to improve this valuations and adjustments.
Keywords
Credit default swap valuation
credit value adjustment
debt value adjustment
structural models
multivariate variance gamma
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