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Integrated structural approach to Credit Value Adjustment

Laura Ballotta, Gianluca Fusai and Daniele Marazzina

European Journal of Operational Research, 2019, vol. 272, issue 3, 1143-1157

Abstract: This paper proposes an integrated pricing framework for Credit Value Adjustment of equity and commodity products. The given framework, in fact, generates dependence endogenously, allows for calibration and pricing to be based on the same numerical schemes (up to Monte Carlo simulation), and also allows the inclusion of risk mitigation clauses such as netting, collateral and initial margin provisions. The model is based on a structural approach which uses correlated Lévy processes with idiosyncratic and systematic components; the pricing numerical scheme, instead, efficiently combines Monte Carlo simulation and Fourier transform based methods. We illustrate the tractability of the proposed framework and the performance of the proposed numerical scheme by means of a case study on a portfolio of commodity swaps using real market data.

Keywords: Finance; Credit Value Adjustment; Collateral; Initial margin; Netting (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:272:y:2019:i:3:p:1143-1157

DOI: 10.1016/j.ejor.2018.07.026

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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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