Fixing risk neutral risk measures

DOI10.1142/S0219024916500217MaRDI QIDQ2806368zbMATH OpenOpenAlexFDO

Authors Harvey J. Stein

Publication date 17 May 2016

Published in International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1142/s0219024916500217

zbMATH Keywords

expected exposures (EE), credit valuation adjustment (CVA)exposure calculationoption pricingpotential future exposures (PFE)real world measureriskrisk neutral measure

Mathematics Subject Classification ID

Statistical methods; economic indices and measures (91B82) Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40)

Review text

The author considers neutral risk measures related to credit risk: potential future exposures (PFE), expected exposures (EE), expected positive exposures (EPE), effective expected exposures (EEE) and effective expected positive exposures (EEPE). These measures are used by companies to set economic and regulatory capital levels and influence the reserves that firms need to hold. The author shows that these exposures calculated under the risk neutral measure depend on the choice of numéraires and may be manipulated depending on this choice. So, it is concluded that the exposures should be calculated under the real world measure. It is shown how to use measure changes to compute real world exposures in a risk neutral framework. A canonical risk neutral measure is developed that can be used as an alternative approach to risk calculation.

Recommendations

• Probabilités neutres au risque et asymétrie d'information
• Risk-neutral valuation: Pricing and hedging of financial derivatives
• Optimization of risk measures
• Risk-neutral hedging of interest rate derivatives
• Risk-neutral pricing for arbitrage pricing theory
• scientific article; zbMATH DE number 1501137
• Arbitrage pricing theory and risk-neutral measures
• Estimation of risk-neutral density surfaces
• Excess invariance and shortfall risk measures
• Liquidity-adjusted risk measures

Cites work

• Arbitrage-free bilateral counterparty risk valuation under collateralization and application to credit default swaps
• Modelling, pricing, and hedging counterparty credit exposure. A technical guide

Cited in

(7)

• The virtual universe of finance
• Speed-up credit exposure calculations for pricing and risk management
• A structural approach to default modelling with pure jump processes
• A multi-curve HJM factor model for pricing and risk management
• Exposure valuations and their capital requirements
• Change of measure in a Heston-Hawkes stochastic volatility model
• Risk neutrality regions

This page was built for publication: Fixing risk neutral risk measures

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2806368)