A Boundary Crossing Model of Counterparty Risk

Posted: 23 Mar 2003

See all articles by Kian Esteghamat

Kian Esteghamat

Princeton University - Department of Operations Research and Financial Engineering

Abstract

This paper develops a market-implied credit score as a complement to internal and agency ratings. In its general form, the implied score is a multidimensional process whose passage through regions in space signals different credit events. The model offers analytical tractability and the flexibility to handle complex contract structures including, for example, claims with payoffs that are dependent on multiple credit events and multiple contracting parties. A numerical example on pricing Republic of Argentina bonds and credit derivatives tests the feasibility of the model. The study shows how to overcome several practical challenges of using structural models.

Keywords: Counterparty risk, Sovereign default, Market-implied credit score

JEL Classification: C63, G13, G33

Suggested Citation

Esteghamat, Kian, A Boundary Crossing Model of Counterparty Risk. Available at SSRN: https://ssrn.com/abstract=368220

Kian Esteghamat (Contact Author)

Princeton University - Department of Operations Research and Financial Engineering ( email )

& Bendheim Center for Finance
Princeton, NJ 08544
United States

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