Credit Value Adjustment with Market-implied Recovery

Pascal François () and Weiyu Jiang ()
Additional contact information
Pascal François: HEC Montreal
Weiyu Jiang: McGill University

Journal of Financial Services Research, 2019, vol. 56, issue 2, No 2, 145-166

Abstract: Abstract We present a model for CVA calculation in which the recovery rate is inferred from the term structure of CDS spreads. The negative relation between recovery rates and default probabilities induces a substantial underestimation of the CVA when constant recovery is assumed. That underestimation prevails for both unilateral and bilateral CVA as well as for the CVA capital charge. The underestimation gets more severe as the horizon of the position increases. Our CVA model with market-implied recovery also offers a way to capture correlation effects between the level of exposure and counterparty risk.

Keywords: CVA; Implied recovery; Credit risk; OTC derivatives (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1007/s10693-018-0298-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
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:kap:jfsres:v:56:y:2019:i:2:d:10.1007_s10693-018-0298-5

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10693

DOI: 10.1007/s10693-018-0298-5

Access Statistics for this article

Journal of Financial Services Research is currently edited by Haluk Unal

More articles in Journal of Financial Services Research from Springer, Western Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().