Cossin, Didier and Tomas Hricko, "A Structural Analysis of Credit Risk with Risky Collateral: A methodology for haircut determination", Economic Notes, Vol. 32, No. 2, (July 2003), pp. 243-282.
Abstract: This article analyses the value of credit risk when there is collateral in a range of different situations, including dual-default in a simple setting, stochastic collateral, stochastic bond collateral with stochastic interest rates, continuous and discrete marking-to-market and margin calls. The models confirm many practical intuitions, such as the impact on the haircut level required of the risks of the collateral asset and of the underlying asset to the forward as well as the impact of their correlation. Moreover, the model supports the intuition that the frequency of marking-to-market and collateral are substitutes. The models are also a good basis to understand the portfolio effect of collateral management. Finally they illustrate how differences in prices may arise from pure differences of credit risk management, as illustrated in the case of futures and forwards.
Keywords: Credit, Risk, Stocks, Bonds, Interest Rates, Security, Financial Models.