A quantization approach to the counterparty credit exposure estimation

Michele Bonollo, Luca Di Persio and Immacolata Oliva

International Review of Economics & Finance, 2020, vol. 70, issue C, 335-356

Abstract: During recent years the counterparty risk field has received a growing attention because of the Basel Accord, which asks banks to fulfill finer conditions concerning counterparty credit exposures arising from banks’ derivatives, securities financing transactions, default and downgrade risks characterizing the Over The Counter derivatives market, etc. Consequently, the development of effective and more accurate measures of risk have been pushed, particularly focusing on the estimate of the future fair value of derivatives with respect to prescribed time horizon and fixed grid of time buckets. Common methods, used to treat the latter scenario, are mainly based on ad hoc implementations of the Monte Carlo approach, characterized by a high computational cost, being strongly dependent on the number of considered assets. This is why many financial players moved to more effective and time saving technologies, e.g., based on grid computing and Graphics Processing Units (GPU) capabilities. In the present paper we exploit an alternative approach based on different algorithmic strategies by showing how to implement the quantization technique to derive accurate estimate for both pricing and volatility values. Our approach turns out to produce sharp results for the counterparty risk evaluation, with great computational benefits if compared to the Monte Carlo approach.

Keywords: Quantization; Counterparty credit risk; Expected positive exposure; European option (search for similar items in EconPapers)
JEL-codes: C02 C53 C63 G13 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S105905602030174X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: A Quantization Approach to the Counterparty Credit Exposure Estimation (2015)
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:eee:reveco:v:70:y:2020:i:c:p:335-356

DOI: 10.1016/j.iref.2020.08.005

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().