Post by Chris Kenyon on Nov 26, 2012 9:30:38 GMT 4
CDS pricing under Basel III: capital relief and default protection
Chris Kenyon and Andrew Greeny
22 November 2012,
Abstract
Basel III introduces new capital charges for CVA. These charges, and
the Basel 2.5 default capital charge can be mitigated by CDS. Therefore, to price in the capital relief that CDS contracts provide, we introduce a CDS pricing model with three legs: premium; default protection; and capital relief. Under simple assumptions we show that 20% to over 50% of observed CDS spread could be due to priced in capital relief. Given that this is di erent for IMM and non-IMM banks will we see di erential pricing?
arxiv.org/pdf/1211.5517.pdf
Chris Kenyon and Andrew Greeny
22 November 2012,
Abstract
Basel III introduces new capital charges for CVA. These charges, and
the Basel 2.5 default capital charge can be mitigated by CDS. Therefore, to price in the capital relief that CDS contracts provide, we introduce a CDS pricing model with three legs: premium; default protection; and capital relief. Under simple assumptions we show that 20% to over 50% of observed CDS spread could be due to priced in capital relief. Given that this is di erent for IMM and non-IMM banks will we see di erential pricing?
arxiv.org/pdf/1211.5517.pdf