CVA wrong way risk multiplier decomposition and efficient CVA curve

Tao Pang, Wei Chen and Le Li

Journal of Risk Management in Financial Institutions, 2015, vol. 8, issue 4, 390-404

Abstract: Credit value adjustment (CVA) is an adjustment added to the fair value of an over-thecounter trade due to the counterparty risk. When the exposure to the counterparty changes in the same direction as the counterparty default risk the so-called wrong-way-risk (WWR) must be taken into account. Calculating CVA with WWR has been a computationally challenging task, especially because it has to be done frequently. In this paper, we start with the fact that the ratio of CVA with WWR to CVA under the independent exposure and default assumption depends on the means and standard deviations of exposure and default probability and their linear correlation. The CVA WWR ratio is then decomposed into two factors, a robust correlation and a profile multiplier with further economic insight into the CVA WWR ratio. The distribution free approach in this paper entails an efficient algorithm of curve-based CVA WWR calculation. A numerical study illustrates the algorithm and its benefits.

Keywords: credit value adjustment; CVA; wrong-way-risk; WWR (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hstalks.com/article/1771/download/ (application/pdf)
https://hstalks.com/article/1771/ (text/html)
Requires a paid subscription for full access.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2015:v:8:i:4:p:390-404

Access Statistics for this article

More articles in Journal of Risk Management in Financial Institutions from Henry Stewart Publications
Bibliographic data for series maintained by Henry Stewart Talks ().