The Research On Pricing Of CDS And CDO In General Equilibrium

Credit risk means any risk of changing value.Factors that cause credit change should be including factors of capital market and product market.Credit derivatives are designed for transiting and managing credit risk.The reason that the pricing of credit derivatives exists risk is that traditional pricing models embody only factors of capital market without that of product market.The way of pricing exists risk for financial institution and regulator.Nowadays,the pricing of credit derivatives usually proceeds from the view of investors,which uses no arbitrage principle.No arbitrage principle focuses on partial equilibrium in capital market and depends on MM hypothesis and results of the pricing of credit derivatives contains only credit risk of capital market and is divorced from physical economy.So product market should be bring into pricing model if we would like to reduce the risk of pricing.In this paper,we use the framework of general equilibrium,which introduce production market and construct pricing model of credit derivatives in the view of general equilibrium,and discuss the priorities of the model.Firstly,we discuss traditional pricing model and introduce the pricing risk of the model.And we discuss various risk and the relationship with pricing risk of credit derivatives.It is concluded that the pricing of credit derivatives had divorced from production market,which cause pricing risk for financial institution.Secondly,we construct the pricing model of CDS and CDO in the view of general equilibrium and depict the superiors to traditional model.The pricing model of CDS and CDO contains capital market and capital market in general equilibrium framework.The equilibrium contains equilibrium of production market and capital market and focuses on credit risk of production market.And the equilibrium that adjust to pricing in no arbitrage principle has the advantages of depicting risk.The pricing could be divided into two parts which are credit risk in capital market and credit risk in production market linked with interest rate.That means the risk in two markets are interrelated and interact on each other.Comparing pricing in general equilibrium and that in no arbitrage principle,it can be found that pricing of credit derivatives in general equilibrium would depict various risks deeper and richer.Lastly,price of credit derivatives in general equilibrium can alarm risk more clearly during financial crisis.Thirdly,we apply the pricing model of CDS and CDO in general equilibrium to real production and do empirical analysis.It is found that the pricing risk of credit derivatives in no arbitrage might be higher during financial crisis than that during normal period.And the pricing risk of CDO in no arbitrage principle is more than that of CDS in no arbitrage principle.Moreover,the bigger proportion of tranche in the same CDO,the lesser pricing risk of tranche in no arbitrage.It can be concluded that pricing of credit derivatives in the view of general equilibrium might remedy the defects of that in no arbitrage principle,so it is a important reference index in risk management for financial institution and should be valued more in the management of credit risk.Finally,we come to some conclusions and present some prospects for future research.