Credit spread modeling effects on counterparty risk valuation adjustments: a spanish case study

Alberto Fernández Muñoz de Morales (a.fernandez.munozmor@bbva.com)
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Alberto Fernández Muñoz de Morales: Tecnología y Metodologías. BBVA

No 2013-32, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: We analyze the effects of the financial crisis in credit valuation adjustments (CVA's). Following the arbitrage-free valuation framework presented in Brigo et al. (2009), we consider a model with stochastic Gaussian interest rates and CIR++ default intensities. Departing from previous literature, we are able to calibrate default intensities profiting from Gaussian mapping techniques presented in Brigo and Alfonsi (2004), and reproduce the historically observed instantaneous covariances of CDS prices. To test the calibration procedure, we track the Spanish financial sector, who has behaved in a singular manner through the crisis, regarded among the safest in Europe at the beginning, and in need of a partial bailout a few years later. We calculate adjustments involving the two major Spanish banks and a generic European counterpart in these two situations for both interest rate and credit derivatives.

Keywords: Riesgo de contraparte; Ajuste de valoración de crédito libre de riesgo; Permutas de incumplimiento crediticio; Volatilidad del spread de crédito; Counterparty Risk; Arbitrage-Free Credit Valuation Adjustment; Credit Default Swaps; Credit Spread Volatility. (search for similar items in EconPapers)
JEL-codes: C15 C63 G12 G13 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2013
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Note: Este trabajo es parte de mi tesis doctoral en Banca y Finanzas Cuantitativas, supervisado por Alfonso Novales Cinca, del Departamento de Economía Cuantitativa de la Universidad Complutense de Madrid. Quiero expresar mi agradecimiento por los comentarios y observaciones a José Manuel López, Juan Antonio de Juan y Daniel Andrés.
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