Evaluation of credit value adjustment in K-forward

Xuemiao Hao, Chunli Liang and Linghua Wei

Insurance: Mathematics and Economics, 2017, vol. 76, issue C, 95-103

Abstract: We model and quantify counterparty credit risk for K-forward, a newly proposed longevity-linked security. We focus on the evaluation of credit value adjustment (CVA) from the longevity risk hedger’s perspective. The modelling involves two folds. First, we use a vector autoregressive integrated moving-average process to model the time series of mortality indexes that is obtained by applying the original Cairns–Blake–Dowd model. Then, the risk-neutral default probability of the hedge provider is obtained by calibrating a reduced-form default model on the market price of bonds issued by the hedge provider. We calculate and compare CVA in K-forwards for different combinations of hedger provider, reference year and recovery rate.

Keywords: Credit value adjustment; K-forward; Longevity risk; Multivariate time series; Risk-neutral default probability (search for similar items in EconPapers)
JEL-codes: C13 C15 G22 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:76:y:2017:i:c:p:95-103

DOI: 10.1016/j.insmatheco.2017.07.004

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