This paper studies the valuation of game-type credit default swaps (CDSs) that allow the protection buyer and seller to raise or reduce the respective position once prior to default. This leads to the study of a stochastic game with optimal stopping subject to early termination resulting from a default . Under a structural credit risk model based on spectrally negative Levy processes, we analyze the existence of the Nash equilibrium and derive the associated saddle point. Using the principles of smooth and continuous fit , we determine the buyer's and seller's equilibrium exercise strategies , which are of threshold type . Numerical examples are provided to illustrate the impacts of default risk and  contractual features on the fair premium and exercise strategies .
This paper studies game-type credit default swaps that allow the protection buyer and seller to raise or reduce their respective positions once prior to default. This leads to the study of an optimal stopping game subject to early default termination . Under a structural credit risk model based on spectrally negative Levy processes, we apply the principles of smooth and continuous fit to identify the equilibrium exercise strategies for the buyer and the seller. We then rigorously prove the existence of the Nash equilibrium and compute the contract value at equilibrium . Numerical examples are provided to illustrate the impacts of default risk and other contractual features on the players' exercise timing at equilibrium .
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the valuation of
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(CDSs)
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the respective position
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a stochastic game with optimal stopping
an optimal stopping game
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termination resulting from a default
default termination
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analyze the existence of the Nash equilibrium and derive the associated saddle point. Using the
apply the
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, we determine the buyer's and seller's
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, which are of threshold type
for the buyer and the seller. We then rigorously prove the existence of the Nash equilibrium and compute the contract value at equilibrium
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other
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fair premium and exercise strategies
players' exercise timing at equilibrium