Wrong-way risk bounds in counterparty credit risk management

Amir Memartoluie, David Saunders and Tony Wirjanto

Journal of Risk Management in Financial Institutions, 2017, vol. 10, issue 2, 150-163

Abstract: We study the problem of finding the worst-case joint distribution of a set of risk factors given prescribed multivariate marginals and a non-linear loss function. We show that when the risk measure is conditional value-at-risk (CVaR), and the distributions are discretised, the problem can be conveniently solved using linear programming. The method has applications to any situation where marginals are provided and bounds need to be determined on total portfolio risk. In this paper, we emphasise applications to counterparty credit risk including the assessment of wrong-way risk. A suitable algorithm for counterparty risk measurement of a real portfolio is also presented.

Keywords: counterparty credit risk; CVaR; Basel III; linear programming; risk management; distributions with given marginals (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2017:v:10:i:2:p:150-163

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