A method for pricing the credit valuation adjustment of unlisted companies

Matteo Formenti

Journal of Risk Management in Financial Institutions, 2019, vol. 12, issue 2, 184-194

Abstract: Estimating the credit valuation adjustment (CVA) for unlisted companies is a challenging issue because it is not possible to estimate the risk neutral default probability from either the credit default swap (CDS) par spread or equity stock. This paper proposes a calibration method that easily estimates the market risk premium, which is added to the internal rating model of unlisted companies to obtain a risk neutral default probability. The method is applied to price the CVA of a portfolio of swaps for unlisted counterparties using the advanced method approach, and the results are benchmarked using the Bank for International Settlements (BIS) approach for illiquid counterparties. Last, the robustness tests confirm the reliability of the calibration method, both for its use in risk management and accounting.

Keywords: credit valuation adjustment; counterparty credit risk; International Financial Reporting Standard (IFRS) (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2019:v:12:i:2:p:184-194

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