A three-dimensional extension of the structural default model with firms' values driven by correlated diffusion processes is presented. Green's function based semi-analytical methods for solving the forward calibration problem and backward pricing problem are developed. These methods are used to analyze bilateral count…
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48 results for “Credit Value Adjustment”
A structural approach to pricing credit default swaps with credit and debt value adjustmentsq-fin.PR
A multi-dimensional extension of the structural default model with firms' values driven by diffusion processes with Marshall-Olkin-inspired correlation structure is presented. Semi-analytical methods for solving the forward calibration problem and backward pricing problem in three dimensions are developed. The model is…
This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American style options in most cases, which require a backward induction valuation. To co…
Renewing Reliability: Valuation and Credit Risk Adjustments for Renewable Power Purchase Agreementsq-fin.PR
Paper develops framework for valuing and assessing credit risk in renewable PPAs.
problem Renewable PPAs expose both parties to counterparty credit risk.
method Modelled joint dynamics of electricity prices and renewable output, incorporated default probabilities.
result Provides transparent metric for PPA valuation under counterparty risk.
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 ins…
New method reduces CVA-VaR computation complexity.
problem Efficiently estimating CVA-VaR for financial risk management.
method Multilevel nested simulation for probabilities.
result 3 orders of magnitude reduction in computational complexity.
We present a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral …
Study estimates default probabilities without liquid CDS, using real-world probabilities.
problem Estimating default probabilities in markets with no liquid CDS.
method Use minimum variance hedge, estimate real-world probabilities.
result Validates use of real-world probabilities for CVA calculations.
Model clarifies network effects on CVA, revealing significant differences in derivative contract values.
problem Network effects on CVA in financial contracts.
method Developed a model to analyze default probabilities in a network of contracts.
result Network effects can significantly alter CVA values, leading to multi-modal distributions.
The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related Credit Valuation Adjustment, (CVA), Debt Valuation Adjustment (DVA), Liquidity Valuation Adjustment (LVA) and Replacement Cost (RC) issues, jointly referred to in t…
Paper introduces OCRR Score for quantifying DeFi wallet credit risk.
problem Inability to assess credit risk in decentralized finance.
method Probabilistic measure based on historical and predictive on-chain activity.
result Dynamic adjustment of LTV and LT based on wallet risk profile.
Robust XVAq-fin.PR
Framework for robust credit risk valuation adjustments.
problem Valuation of credit default swap portfolios with uncertain counterparty bond returns.
method Arbitrage-free framework, bounds derived from nonlinear ODEs, collateral and closeout payoffs considered.
result Upper and lower bounds for XVA process derived, showing nonlinear effects of credit contagion.
Is an option to early terminate a swap at its market value worth zero? At first sight it is, but in presence of counterparty risk it depends on the criteria used to determine such market value. In case of a single uncollateralised swap transaction under ISDA between two defaultable counterparties, the additional unilat…
We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment involves a long position in a put option plus a short position in a call option…
This paper addresses credit valuation adjustment with a new closeout convention.
problem Accurate estimation of financial claim value considering counterparty credit risk.
method Theoretical and computational analysis of a nonlinear valuation system using neural networks.
result A neural network-based algorithm effectively solves the high-dimensional nonlinear valuation system.
We analyze the counterparty risk embedded in CDS contracts, in presence of a bilateral margin agreement. First, we investigate the pricing of collateralized counterparty risk and we derive the bilateral Credit Valuation Adjustment (CVA), unilateral Credit Valuation Adjustment (UCVA) and Debt Valuation Adjustment (DVA).…
Paper classifies institutions based on credit, debit, and funding adjustment paradigms.
problem Classifying institutions based on credit, debit, and funding adjustment paradigms.
method Mathematical framework based on the principle of invariance.
result Improved solution of principle of invariance equations for accurate metrics calculation.
Even in the simple one-factor credit portfolio model that underlies the Basel II regulatory capital rules coming into force in 2007, the exact contributions to credit value-at-risk can only be calculated with Monte-Carlo simulation or with approximation algorithms that often involve numerical integration. As this may r…
The importance of counterparty credit risk to the derivative contracts was demonstrated consistently throughout the financial crisis of 2008. Accurate valuation of Credit value adjustment (CVA) is essential to reflect the economic values of these risks. In the present article, we reviewed several different approaches f…
The paper studies value adjustments and dynamic hedging for reinsurance counterparty risk.
problem Reinsurance counterparty credit risk (RCCR) and its impact on insurance companies.
method A novel model accounting for contagion effects, characterized value adjustment via PIDE, derived hedging strategies using quadratic method.
result Dynamic hedging strategies can significantly reduce reinsurance counterparty risk.
The importance of collateralization through the change of funding cost is now well recognized among practitioners. In this article, we have extended the previous studies of collateralized derivative pricing to more generic situation, that is asymmetric and imperfect collateralization with the associated counter party c…
New methods for calculating credit valuation adjustment with reduced noise and faster computation.
problem High statistical noise in computing sensitivities of CVA due to non-differentiable default intensities.
method Ad hoc analytical estimators to overcome non-differentiability and finite differences.
result Low statistical noise and fast computation of sensitivities to market quotes.
Approximates CVA of European options with WWR using correlation expansions.
problem Computing CVA of European options with Wrong Way Risk in a default intensity setting.
method Exploits a correlation expansion approach to approximate option pricing.
result Numerical evaluations show the method's performance compared to existing methods.
We discuss a general dynamic replication approach to counterparty credit risk modeling. This leads to a fundamental jump-process backward stochastic differential equation (BSDE) for the credit risk adjusted portfolio value. We then reduce the fundamental BSDE to a continuous BSDE. Depending on the close out value conve…
Paper simplifies default process modeling and credit valuation.
problem Modeling and pricing derivative securities with credit risk.
method Integrates default process, probability, and correlation into a unified framework.
result Risky valuation is Martingale in the proposed model.
This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors being hedged, resembles in economics an issued variable funding note, and should be priced at the m…
New method for valuing and hedging credit risk when defaults cannot be hedged.
problem Valuation and hedging of counterparty credit risk when there's no protection available.
method Local risk-minimization approach via BSDE (Backward Stochastic Differential Equation)
result Optimal strategy computed for valuing and hedging credit risk.
Current auto loans converge to super-prime credit despite remaining underwater.
problem Inefficient consumer behavior in auto loans leading to suboptimal credit risk.
method Large-sample statistical hypothesis test on transition matrix between risk bands.
result All current risk bands converge to super-prime credit, despite remaining underwater.
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark v…
Are causal effect estimations enough for optimal recommendations under multitreatment scenarios?stat.ML
Enhances credit card limit adjustments by considering treatment uncertainty and prediction criteria.
problem Optimal treatment selection under multitreatment scenarios.
method Proposes a comprehensive methodology incorporating conditional value-at-risk and prediction criterion for continuous outcomes.
result Significantly improved policy performance in credit card limit adjustments.
Credit (CVA), Debit (DVA) and Funding Valuation Adjustments (FVA) are now familiar valuation adjustments made to the value of a portfolio of derivatives to account for credit risks and funding costs. However, recent changes in the regulatory regime and the increases in regulatory capital requirements has led many banks…
Implementation of an Asymmetric Adjusted Activation Function for Class Imbalance Credit Scoringcs.LG
A new activation function improves credit scoring accuracy for imbalanced datasets.
problem Imbalanced datasets in credit scoring lead to underestimation of misclassification costs.
method Introduces ASIG, an asymmetric adjusted Sigmoid function.
result ASIG-embedded classifier outperforms traditional classifiers across various imbalance ratios.
Modeling firm default with a variable threshold based on management decisions.
problem Estimating default probability with asymmetric information.
method Generalized structural model with a variable default threshold.
result The information level significantly impacts default probability and credit yield spread.
The purpose of this paper is introducing rigorous methods and formulas for bilateral counterparty risk credit valuation adjustments (CVA's) on interest-rate portfolios. In doing so, we summarize the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, as de…
Paper proposes a new measure for systemic credit concentration risk.
problem Systemic credit concentration risk not fully captured by single institution measures.
method Network model to describe overlapping portfolios and quantify systemic risk.
result Network metric quantifies systemic risk not reflected in single portfolio measures.
A novel optimisation framework through quadratic nonlinear projection is introduced for credit portfolio when the portfolio risk is measured by Conditional Value-at-Risk (CVaR). The whole optimisation procedure to search toward the optimal portfolio state is conducted by a series of single-step optimisations under the …
Numerical analysis of an extended structural default model with mutual liabilities and jump riskq-fin.CP
We consider a structural default model in an interconnected banking network as in Lipton [International Journal of Theoretical and Applied Finance, 19(6), 2016], with mutual obligations between each pair of banks. We analyse the model numerically for two banks with jumps in their asset value processes. Specifically, we…
Interest-Rate Modelling in Collateralized Markets: Multiple curves, credit-liquidity effects, CCPsq-fin.PR
The market practice of extrapolating different term structures from different instruments lacks a rigorous justification in terms of cash flows structure and market observables. In this paper, we integrate our previous consistent theory for pricing under credit, collateral and funding risks into term structure modellin…
This paper improves bond market making by adjusting hit-ratios for client flow quality.
problem Economic misleading of raw hit-ratios in corporate bond market making.
method Stochastic-control framework with residual-quality-adjusted hit-ratio.
result Optimal quotes decompose into various components, improving service/economics frontier.
Extends ASRF model for green and brown loans, accounting for systematic and idiosyncratic risks.
problem Credit risk assessment for portfolios of green and brown loans.
method Two-factor copula structure, skewed distributions for systematic risk, Gaussian for idiosyncratic risk, non-uniform exposure setting.
result Portfolio loss convergence to a limit reflecting green and brown loan characteristics.
In this paper we discuss the issue of computation of the bilateral credit valuation adjustment (CVA) under rating triggers, and in presence of ratings-linked margin agreements. Specifically, we consider collateralized OTC contracts, that are subject to rating triggers, between two parties -- an investor and a counterpa…
Private credit markets have expanded significantly, offering unique lending technology to private equity firms.
problem Understanding the growth and characteristics of private credit markets.
method Systematic survey of academic literature, development of integrated theoretical framework, empirical evidence.
result Private credit markets offer a distinct lending technology with higher spreads over syndicated loans.
In this article, we combine replication pricing with expectation pricing for derivative trades that are partially collateralized by cash. The derivatives are replicated by underlying assets and cash, using repurchasing agreement (repo) and margining, which incur funding costs. We derive a partial differential equation …
The credit spread curve. I: Fundamental concepts, fitting, par-adjusted spread, and expected returnq-fin.PR
The paper explains how to construct a credit spread curve from bond prices.
problem The challenge of constructing a credit spread curve from bond prices.
method Fit parametrised survival curves to construct the curve, avoiding the Z-spread issue.
result A concise treatment of the high-dollar price bonds trading at higher yields is explained.
Quantum tech speeds up financial risk assessment.
problem Improving credit valuation adjustments using quantum mechanics.
method Developed a quantum algorithm using Bayesian quantum amplitude estimation and engineered likelihood functions.
result Significant speedup in quantum computations for CVA over classical methods.
We depart from the usual methods for pricing contracts with the counterparty credit risk found in most of the existing literature. In effect, typically, these models do not account for either systemic effects or at-first-default contagion and postulate that the contract value at default equals either the risk-free valu…
In this work we derive an approximated no-arbitrage market valuation formula for Constant Maturity Credit Default Swaps (CMCDS). We move from the CDS options market model in Brigo (2004), and derive a formula for CMCDS that is the analogous of the formula for constant maturity swaps in the default free swap market unde…
Distributionally Robust XVA via Wasserstein Distance: Wrong Way Counterparty Credit and Funding Riskq-fin.MF
Paper calculates robust XVA for derivatives under distributional uncertainty using Wasserstein distance.
problem Distributional uncertainty in over-the-counter derivatives pricing.
method Wasserstein distance as ambiguity measure, dual formulations derived using Lagrangian duality.
result Characterization and quantification of wrong-way counterparty credit and funding risks.