Handling model risk with XVAs

Cyril Bénézet () and Stéphane Crépey ()
Additional contact information
Cyril Bénézet: LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise
Stéphane Crépey: LPSM (UMR_8001) - Laboratoire de Probabilités, Statistique et Modélisation - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité, UPCité - Université Paris Cité

Post-Print from HAL

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.

Keywords: Pricing models; Model risk; Calibration; Market risk; Counterparty credit risk; Transaction Costs; Cross Valuation Adjustments (XVAs) (search for similar items in EconPapers)
Date: 2024
Note: View the original document on HAL open archive server: https://hal.science/hal-03675291v3
References: Add references at CitEc
Citations:

Published in Frontiers of Mathematical Finance, 2024, 3 (4), pp.490-519. ⟨10.3934/fmf.2024016⟩

Downloads: (external link)
https://hal.science/hal-03675291v3/document (application/pdf)

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:hal:journl:hal-03675291

DOI: 10.3934/fmf.2024016

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().