Financial Crisis and the Pricing of Single-name CDS in General Equilibrium

Abstract

Abstract:

Subprime crisis had been considered to be relevant to the pricing of credit derivatives. Currently, methods of credit derivative pricing are based on no arbitrage principle. But researching in only one framework may result in blind spot. This paper builds a pricing model of single-name CDS in general equilibrium of production market and finance market. It finds that price of CDS in general equilibrium already contains price in no arbitrage principle. In sensitivity analysis, we compare the pricing of CDS in general equilibrium case and in no arbitrage case and find that price in general equilibrium can depict risk of CDS more sufficiently and accurately. In scenario simulation, we compare the pricing of CDS before and after the financial crisis in general equilibrium case and in no arbitrage case and find that gap of the pricing of CDS between them is bigger during the financial crisis but smaller after the financial crisis. This also reflects that pricing in general equilibrium case is an improvement to the pricing in no arbitrage case.

Key words: financial crisis, general equilibrium, CDS

Chen Yansheng, Zou Huiwen. Financial Crisis and the Pricing of Single-name CDS in General Equilibrium[J]. , 2017, 29(4): 25-35.

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