Distributionally Robust XVA via Wasserstein Distance: Wrong Way Counterparty Credit and Funding Risk

Derek Singh and Shuzhong Zhang

Applied Economics and Finance, 2020, vol. 7, issue 6, 70-100

Abstract: This paper investigates calculations of robust X-Value adjustment (XVA), in particular, credit valuation adjustment (CVA) and funding valuation adjustment (FVA), for over-the-counter derivatives under distributional ambiguity using Wasserstein distance as the ambiguity measure. Wrong way counterparty credit risk and funding risk can be characterized (and indeed quantified) via the robust XVA formulations. The simpler dual formulations are derived using recent Lagrangian duality results. Next, some computational experiments are conducted to measure the additional XVA charges due to distributional ambiguity under a variety of portfolio and market configurations. Finally some suggestions for further work are discussed.

Date: 2020
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