Handling model risk with XVAs

Cyril B\'en\'ezet and St\'ephane Cr\'epey
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Cyril B\'en\'ezet: LaMME, ENSIIE
St\'ephane Cr\'epey: LPSM
Authors registered in the RePEc Author Service: Claudio Albanese

Papers from arXiv.org

Abstract: In this paper we revisit Burnett (2021) \& Burnett and Williams (2021)'s notion of hedging valuation adjustment (HVA), originally intended to deal with dynamic hedging frictions such as transaction costs, in the direction of model risk. The corresponding HVA reconciles a global fair valuation model with the local models used by the different desks of the bank. Model risk and dynamic hedging frictions indeed deserve a reserve, but a risk-adjusted one, so not only an HVA, but also a contribution to the KVA of the bank. The orders of magnitude of the effects involved suggest that local models should not so much be managed via reserves, as excluded altogether.

Date: 2022-05, Revised 2024-08
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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http://arxiv.org/pdf/2205.11834 Latest version (application/pdf)

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Working Paper: Handling model risk with XVAs (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2205.11834

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