Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/89314
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Title: Counterparty credit risk and derivatives pricing
Authors: Li, G 
Zhang, C
Issue Date: Dec-2019
Source: Journal of financial economics, Dec. 2019, v. 134, no. 3, p. 647-668
Abstract: We derive a model with qualitative implications for options pricing under counterparty credit risk and provide empirical evidence using the data from the Hong Kong derivatives market during 2005–2014. We find that the log-price difference between a derivative warrant with counterparty credit risk and an otherwise identical option without counterparty credit risk is significantly and negatively associated with the credit default swap spread on the warrant issuer. We also find that the prices of out-of-the-money put warrants are more sensitive to credit risk than those of other warrants. Our results show counterparty credit risk matters for derivative pricing.
Keywords: Counterparty credit risk
Mitigating mechanism
Options pricing with vulnerability
Derivative warrants
Publisher: Elsevier
Journal: Journal of financial economics 
ISSN: 0304-405X
DOI: 10.1016/j.jfineco.2019.04.011
Rights: © 2019 Elsevier B.V. All rights reserved.
© 2019. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
The following publication Li, G., & Zhang, C. (2019). Counterparty credit risk and derivatives pricing. Journal of Financial Economics, 134(3), 647-668 is available at https://doi.org/10.1016/j.jfineco.2019.04.011.
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