Estimating the counterparty risk exposure by using the Brownian motion local time

DOI10.1515/AMCS-2017-0030MaRDI QIDQ2011920zbMATHOpenAlexFDO

Authors Michele Bonollo, Luca Di Persio, Luca Mammi, I. Oliva

Publication date 27 July 2017

Published in International Journal of Applied Mathematics and Computer Science (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1704.03244

zbMATH Keywords

exposure at defaultcounterparty credit riskBasel financial frameworklocal times Brownian motionover-the-counter derivatives

Mathematics Subject Classification ID

Credit risk (91G40)

Abstract: In recent years, the counterparty credit risk measure, namely the default risk in emph{Over The Counter} (OTC) derivatives contracts, has received great attention by banking regulators, specifically within the frameworks of emph{Basel II} and emph{Basel III.} More explicitly, to obtain the related risk figures, one has first obliged to compute intermediate output functionals related to the emph{Mark-to-Market} (MtM) position at a given time $tin[0,T],$ T being a positive, and finite, time horizon. The latter implies an enormous amount of computational effort is needed, with related highly time consuming procedures to be carried out, turning out into significant costs. To overcome latter issue, we propose a smart exploitation of the properties of the (local) time spent by the Brownian motion close to a given value.

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Cited in

(2)

• Extending the Merton model with applications to credit value adjustment
• The default risk charge approach to regulatory risk measurement processes

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