XVA analysis from the balance sheet

DOI10.1080/14697688.2020.1817533zbMATH Open1479.91387arXiv2009.00368OpenAlexW3105091426MaRDI QIDQ5014178FDOQ5014178

Rodney Hoskinson, Bouazza Saadeddine, Claudio Albanese, Stéphane Crépey

Publication date: 1 December 2021

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: XVAs denote various counterparty risk related valuation adjustments that are applied to financial derivatives since the 2007--09 crisis. We root a cost-of-capital XVA strategy in a balance sheet perspective which is key in identifying the economic meaning of the XVA terms. Our approach is first detailed in a static setup that is solved explicitly. It is then plugged in the dynamic and trade incremental context of a real derivative banking portfolio. The corresponding cost-of-capital XVA strategy ensures to bank shareholders a submartingale equity process corresponding to a target hurdle rate on their capital at risk, consistently between and throughout deals. Set on a forward/backward SDE formulation, this strategy can be solved efficiently using GPU computing combined with deep learning regression methods in a whole bank balance sheet context. A numerical case study emphasizes the workability and added value of the ensuing pathwise XVA computations.

Full work available at URL: https://arxiv.org/abs/2009.00368

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zbMATH Keywords

deep learningquantile regressioncounterparty riskmarket incompletenesswealth transferX-valuation adjustment (XVA)balance sheet of a bank

Mathematics Subject Classification ID

Nonparametric regression and quantile regression (62G08) Derivative securities (option pricing, hedging, etc.) (91G20) Artificial neural networks and deep learning (68T07) Portfolio theory (91G10)

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Cited In (12)

• Credit, funding, margin, and capital valuation adjustments for bilateral portfolios
• Arbitrage-free pricing of derivatives in nonlinear market models
• Operational research and artificial intelligence methods in banking
• When Capital Is a Funding Source: The Anticipated Backward Stochastic Differential Equations of X-Value Adjustments
• Derivatives risks as costs in a one-period network model
• Pathwise CVA regressions with oversimulated defaults
• Sparse grid method for highly efficient computation of exposures for xVA
• XVA in a multi-currency setting with stochastic foreign exchange rates
• Deep xVA Solver: A Neural Network–Based Counterparty Credit Risk Management Framework
• Positive XVAs
• Quantitative reverse stress testing, bottom up
• xVA: DEFINITION, EVALUATION AND RISK MANAGEMENT

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