Title: Marking to market credit derivatives on simultaneous credit events
Authors: Umberto Cherubini - University of Bologna (Italy) [presenting]
Abstract: Credit derivative contracts on simultaneous default risk of clusters of obligors are proposed in a model that can be easily estimated and validated on CDS market data. We provide pricing formulas and hedging strategies, allowing for both systemic risk and contagion. When the systemic shock is independent (pure systemic risk), we derive static hedges for the systemic credit derivatives using a credit index. The model also provides a contagion index. We apply the model to the most representative banks of 8 European countries, during the European sovereign crisis, and we find that our model provides a good representation in 4 cases.