Counterparty risk and funding: immersion and beyond

Stéphane Crépey () and Shiqi Song
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Stéphane Crépey: Laboratoire de Mathématiques et Modélisation d’Évry
Shiqi Song: Laboratoire de Mathématiques et Modélisation d’Évry

Finance and Stochastics, 2016, vol. 20, issue 4, No 4, 930 pages

Abstract: Abstract In Crépey (Math. Finance 25:23–50, 2015), a basic reduced-form counterparty risk modelling approach was introduced under a standard immersion hypothesis between a reference filtration and the filtration progressively enlarged by the default times of the two parties. This basic setup, with a related continuity assumption on some of the data at the first default time of the two parties, is too restrictive for wrong-way and gap risk applications, such as counterparty risk on credit derivatives. This paper introduces an extension of the basic approach, implements it through marked default times and applies it to counterparty risk on credit derivatives.

Keywords: Counterparty risk; Funding; BSDE; Reduced-form credit modelling; Immersion; Wrong-way risk; Gap risk; Collateral; Credit derivatives; Marked default times; Marshall–Olkin copula; 91G40; 60H10; 60G07 (search for similar items in EconPapers)
JEL-codes: D52 D53 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (28)

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DOI: 10.1007/s00780-016-0305-3

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