Share these talks and lectures with your colleagues
Invite colleaguesPractice paper
CVA wrong way risk multiplier decomposition and efficient CVA curve
Journal of Risk Management in Financial Institutions,
8
(4),
390-404
(2015)
Abstract
Credit value adjustment (CVA) is an adjustment added to the fair value of an over-thecounter trade due to the counterparty risk. When the exposure to the counterparty changes in the same direction as the counterparty default risk the so-called wrong-way-risk (WWR) must be taken into account. Calculating CVA with WWR has been a computationally challenging task, especially because it has to be done frequently. In this paper, we start with the fact that the ratio of CVA with WWR to CVA under the independent exposure and default assumption depends on the means and standard deviations of exposure and default probability and their linear correlation. The CVA WWR ratio is then decomposed into two factors, a robust correlation and a profile multiplier with further economic insight into the CVA WWR ratio. The distribution free approach in this paper entails an efficient algorithm of curve-based CVA WWR calculation. A numerical study illustrates the algorithm and its benefits.
Keywords: credit value adjustment; CVA; wrong-way-risk; WWR
The full article is available to subscribers to the journal.
Author's Biography
Tao Pang is an associate professor of mathematics at North Carolina State University. Dr Pang’s research interests include financial risk management, stochastic control and portfolio optimisation. He received his PhD in applied mathematics from Brown University in 2002, and his MS in mathematics and BS in mathematics both from the University of Science and Technology of China in 1997 and 1994, respectively.
Wei Chen is a Director of Stress Testing Solution at SAS Institute Inc. He has more than 15 years’ industry experience in risk analytics and technology for both banking and insurance. At SAS he has managed the research and development of solutions and business consulting in market, credit and liquidity risk management. Wei has published frequently in risk journals. He received his PhD, his primary research area being in financial econometric modelling, from the University of Iowa. He is a certified Financial Risk Manager (FRM).
Le Li is a PhD student of operations research under the supervision of Dr Tao Pang and Dr Wei Chen at North Carolina State University. He received his Master of financial mathematics from North Carolina State University in 2009 and his BS in statistics from Fudan University in 2007.
Citation
Pang, Tao, Chen, Wei and Li, Le (2015, October 1). CVA wrong way risk multiplier decomposition and efficient CVA curve. In the Journal of Risk Management in Financial Institutions, Volume 8, Issue 4. https://doi.org/10.69554/HCOL6639.
© Henry Stewart
Publications LLP
Publications LLP