Unilateral Counterparty Risk Valuation for CDS Under a Regime Switching Interacting Intensities Model

We consider the credit valuation adjustment (CVA) of credit default swap under an interacting intensities model. The default intensities of the protection seller and the reference entity are both influenced by an external shock event. The arrival of the shock event is a regime switching Poisson process, which is a special case of Cox processes. We give the explicit formula for the CVA of the credit and examine the regime switching effect on the premium and the CVA. Copyright Springer Science+Business Media, LLC. 2012