Counterparty Risk: A Review

Stuart M. Turnbull ()
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Stuart M. Turnbull: Bauer College of Business, University of Houston, Houston, Texas 77204

Annual Review of Financial Economics, 2014, vol. 6, issue 1, 241-258

Abstract: This review provides formal definitions of the terms credit value adjustment (CVA) and debt value adjustment (DVA). Estimating these quantities requires modeling the probabilities of default and the loss given default, recognizing the dependence structure among all these inputs. In practice, marginal distributions are used and a copula function assumed. Although it has long been known that different copula functions can produce very different price estimates, keeping marginal distributions constant, there is little empirical evidence about the appropriate form of function to use for modeling default dependence. This review discusses the use of collateral for risk mitigation and its effects on CVA. Regulators have argued that standardized contracts should be cleared through central counterparties (CCPs). However, there are arguments against CCPs.

Keywords: counterparty risk; CVA; DVA; CCP (search for similar items in EconPapers)
JEL-codes: G01 G13 G20 G28 (search for similar items in EconPapers)
Date: 2014
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