Counterparty Credit Risk and Credit Value Adjustment

Gregory, Jon

doi:10.1002/9781118673638

Cited by 104 publications

(47 citation statements)

References 0 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…This risk premium was then clearly defined in a paper by Zhu and Pykhtin ([40]), under the name of Credit Value Adjustment (CVA). In the post-crisis era CVA became a key quantity to be taken into account when trading derivatives in the OTC markets and this spurred a lot of research in the field: see [20], [9] and [5] just to mention some. In practice, CVA is an adjustment of the default-free value of a portfolio, to reduce this price in order to include the default risk.…”

Section: Introductionmentioning

confidence: 99%

CVA and vulnerable options pricing by correlation expansions

2019

View full text Add to dashboard Cite

We consider the problem of computing the Credit Value Adjustment (CVA) of a European option in presence of the Wrong Way Risk (WWR) in a default intensity setting. Namely we model the asset price evolution as solution to a linear equation that might depend on different stochastic factors and we provide an approximate evaluation of the option's price, by exploiting a correlation expansion approach, introduced in [2]. We compare the numerical performance of such a method with that recently proposed by Brigo et al. ([8], [10]) in the case of a call option driven by a GBM correlated with the CIR default intensity. We additionally report some numerical evaluations obtained by other methods.

show abstract

Section: Introductionmentioning

confidence: 99%

CVA and vulnerable options pricing by correlation expansions

2019

View full text Add to dashboard Cite

show abstract

“…The efficacy of independent CVA is limited, since there are important practical cases where credit exposure, V, and the counterparty's default time, τ, are correlated (see Gregory [2010], Chapter 8). Monte Carlo simulation is then used to estimate independent CVA by estimating E[D t V t ], based on a discrete time grid.…”

Section: Wrong Way Risk Can Be Incorporated In Credit Valuementioning

confidence: 99%

“…Assuming that b is given, the piecewise constant deterministic function a t is approximated based on the counterparty's t-maturity credit spreads, s t , and Formula (4) Gregory [2009] and Chapters 7 and 9 of Gregory [2010] for discussions on the use of risk-neutral and physical measure in CVA calculations). Also, λ is the stochastic intensity proposed by Hull and White, i.e., λ t = exp(bV t + a t ).…”

Section: Numerical Examplesmentioning

confidence: 99%

See 1 more Smart Citation

Stochastic Intensity Models of Wrong Way Risk:Wrong Way CVA Need Not Exceed Independent CVA

Ghamami¹,

Goldberg²

2014

JOD

View full text Add to dashboard Cite

A financial institution's counterparty credit exposures may be correlated with the credit quality of a counterparty; wrong way risk refers to the case where this correlation is negative. Hull and White [9] are the first to model wrong way risk in Credit Value Adjustment (CVA) calculations by expressing the counterparty's default intensity in terms of the financial institution's credit exposure to the counterparty. We derive a formula for CVA for a class of models that includes the formulation of Hull and White [9], and we show that wrong way risk does not affect the credit quality of the counterparty. We provide numerical examples based on the Hull and White [9] formulation to estimate CVA for forward contracts and European options. These examples demonstrate that independent CVA can exceed wrong way CVA. This is inconsistent with the scalar multiples of independent CVA that have been adopted by regulators as a proxy for wrong way CVA.

show abstract

“…In financial theory, however, the term "correlation" is typically defined more narrowly, referring only to the linear Pearson correlation coefficient, as in Cherubini et al [2004], Nelsen [2006], or Gregory [2010]. In trading practice, we find the terms "correlation desks" or "correlation trading."…”

mentioning

confidence: 99%

A Comparative Analysis of Correlation Approaches in Finance

Albanese¹,

Li²,

Lobachevskiy³

et al. 2013

JOD

View full text Add to dashboard Cite

EDGAR LOBACHEVSKIYis the senior quantitative analyst at AlphaMetrix LLC in Chicago, IL. edgar.lobachevskiy@gmail.com GUNTER MEISSNERis the director of the master of financial engineering (MFE) program at the University of Hawaii and the CEO of Derivatives Software in Honolulu, HI. meissner@hawaii.edu "… correlation, while being one of the most ubiquitous concepts in modern finance and insurance, is also one of the most misunderstood concepts."-Embrechts et al. [1999] This article analyzes the most widely applied correlation approaches in finance. The authors first discuss primarily bottom-up approaches, such as correlating Brownian motions, the binomial correlation approach, lattice models with dynamic copulas, conditionally independent models, and the contagion correlation approach. New insights on the Gaussian copula, partly blamed for the global financial crisis of 2007-2008, are given. They then discuss top-down approaches, such as Vasicek's 1987 large homogeneous portfolio, inducing correlation in Markov chain models, and Giesecke's 2009 top-down contagion model. They address the mathematical properties of the correlation approaches. A follow-up article will empirically test the correlation approaches by using default data of the U.S. banking sector before and during the 2007-2008 crisis.

show abstract

Counterparty Credit Risk and Credit Value Adjustment

Cited by 104 publications

References 0 publications

CVA and vulnerable options pricing by correlation expansions

CVA and vulnerable options pricing by correlation expansions

Stochastic Intensity Models of Wrong Way Risk:Wrong Way CVA Need Not Exceed Independent CVA

A Comparative Analysis of Correlation Approaches in Finance

Contact Info

Product

Resources

About