An Accurate Solution for Credit Valuation Adjustment (CVA) and Wrong Way Risk

Artikel

This paper presents a Least Square Monte Carlo approach for accurately calculating credit value adjustment (CVA). In contrast to previous studies, the model relies on the probability distribution of a default time/jump rather than the default time itself, as the default time is usually inaccessible. As such, the model can achieve a high order of accuracy with a relatively easy implementation. We find that the valuation of a defaultable derivative is normally determined via backward induction when their payoffs could be positive or negative. Moreover, the model can naturally capture wrong or right way risk.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: The Journal of Fixed Income ; ISSN: 1059-8596 ; Volume: 25 ; Year: 2015 ; Issue: 1 ; Pages: 84-95 ; London: IPR Journals

Classification and Topics

• Classification: Wirtschaft
• Subject: credit value adjustment (CVA) ; wrong way risk ; right way risk ; credit risk modeling ; least square Monte Carlo ; default time approach (DTA) ; default probability approach (DPA) ; collaterilization ; margin and netting

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Xiao, Tim
• Event: Veröffentlichung
• (who): IPR Journals ; ZBW – Leibniz Information Centre for Economics
• (where): London
• (when): 2015

Further information

• DOI: doi:10.3905/jfi.2015.25.1.084
• Handle: http://hdl.handle.net/10419/198046
• Last update: 10.03.2025, 11:43 AM CET