Enemies or Allies: Pricing counterparty credit risk for synthetic CDO tranches

摘要

This research aims to construct a model for pricing counterparty creditrisk (CCR) for synthetic collateralized debt obligation (CDO) tranches byconsidering the relationship between the counterparty and the credit port-folio. A stochastic intensity model is adopted to describe the default eventof the counterparty, and a two-factor Gaussian copula model is applied toaccount for the relationship between the counterparty and underlying creditportfolio. By analyzing the data of CDX NA IG index tranches, we �ndthat the relationship has a signi�cant inuence on the credit value adjust-ment (CVA) for index tranches and, hence, that it should not be ignoredwhen a contract is initiated. In addition, we discover that the inuence hasopposite e�ects and asymmetrical magnitude with respect to the protectionbuyers and protection sellers.