Bilateral Credit Valuation Adjustment for Large Credit Derivatives Portfolios

Lijun Bo and Agostino Capponi

Papers from arXiv.org

Abstract: We obtain an explicit formula for the bilateral counterparty valuation adjustment of a credit default swaps portfolio referencing an asymptotically large number of entities. We perform the analysis under a doubly stochastic intensity framework, allowing for default correlation through a common jump process. The key insight behind our approach is an explicit characterization of the portfolio exposure as the weak limit of measure-valued processes associated to survival indicators of portfolio names. We validate our theoretical predictions by means of a numerical analysis, showing that counterparty adjustments are highly sensitive to portfolio credit risk volatility as well as to default correlation.

Date: 2013-05
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Citations: View citations in EconPapers (3)

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Journal Article: Bilateral credit valuation adjustment for large credit derivatives portfolios (2014)
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