An Accurate Solution for Credit Valuation Adjustment (CVA) and Wrong Way Risk

Tim Xiao

EconStor Open Access Articles and Book Chapters, 2015, vol. 25, issue 1, 84-95

Abstract: This paper presents a Least Square Monte Carlo approach for accurately calculating credit value adjustment (CVA). In contrast to previous studies, the model relies on the probability distribution of a default time/jump rather than the default time itself, as the default time is usually inaccessible. As such, the model can achieve a high order of accuracy with a relatively easy implementation. We find that the valuation of a defaultable derivative is normally determined via backward induction when their payoffs could be positive or negative. Moreover, the model can naturally capture wrong or right way risk.

Keywords: credit value adjustment (CVA); wrong way risk; right way risk; credit risk modeling; least square Monte Carlo; default time approach (DTA); default probability approach (DPA); collaterilization; margin and netting (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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https://www.econstor.eu/bitstream/10419/198046/1/cva-solution-2.pdf (application/pdf)

Related works:
Working Paper: An Accurate Solution for Credit Valuation Adjustment (CVA) and Wrong Way Risk (2015)
Working Paper: An Accurate Solution for Credit Valuation Adjustment (CVA) and Wrong Way Risk (2015)
Working Paper: An Accurate Solution for Credit Valuation Adjustment (CVA) and Wrong Way Risk (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:espost:198046

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