Bilateral credit valuation adjustment for large credit derivatives portfolios

DOI10.1007/S00780-013-0217-4MaRDI QIDQ468421zbMATH OpenOpenAlexFDO

Authors Agostino Capponi, Lijun Bo

Publication date 7 November 2014

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1305.5575

zbMATH Keywords

weak convergencecredit default swapscredit valuation adjustmentdoubly stochastic processes

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10)

Abstract: We obtain an explicit formula for the bilateral counterparty valuation adjustment of a credit default swaps portfolio referencing an asymptotically large number of entities. We perform the analysis under a doubly stochastic intensity framework, allowing for default correlation through a common jump process. The key insight behind our approach is an explicit characterization of the portfolio exposure as the weak limit of measure-valued processes associated to survival indicators of portfolio names. We validate our theoretical predictions by means of a numerical analysis, showing that counterparty adjustments are highly sensitive to portfolio credit risk volatility as well as to default correlation.

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Cited in

(20)

• The pricing of basket options: a weak convergence approach
• Dynamic analysis of counterparty exposures and netting efficiency of central counterparty clearing
• Arbitrage-free valuation of bilateral counterparty risk for interest-rate products: impact of volatilities and correlations
• The valuation of multi-counterparties CDS with credit rating migration
• Systemic risk in interbanking networks
• Markov chain approximation and measure change for time-inhomogeneous stochastic processes
• Impact of Multiple-Curve Dynamics in Credit Valuation Adjustments
• Systemic risk and default clustering for large financial systems
• Bilateral Credit Valuation Adjustment of CDS Under Systemic and Correlated Idiosyncratic Risks
• Funding, repo and credit inclusive valuation as modified option pricing
• Network effects in default clustering for large systems
• A dynamic network model of interbank lending -- systemic risk and liquidity provisioning
• xVA: DEFINITION, EVALUATION AND RISK MANAGEMENT
• Pricing derivatives with counterparty risk and collateralization: a fixed point approach
• Valuation of kth-to-default credit-linked notes with counterparty risk in a reduced-form model
• Dynamic contagion in a banking system with births and defaults
• Calculation of credit valuation adjustment based on least square Monte Carlo methods
• Pricing credit default swaps with bilateral value adjustments
• Short Communication: Dynamic Default Contagion in Heterogeneous Interbank Systems
• Extremal dependence for bilateral credit valuation adjustments

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