Imperial College London

ProfessorDamianoBrigo

Faculty of Natural SciencesDepartment of Mathematics

Chair in Mathematical Finance
 
 
 
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Contact

 

damiano.brigo

 
 
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Location

 

805Weeks BuildingSouth Kensington Campus

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Summary

 

Publications

Citation

BibTex format

@article{Brigo:2018:10.1016/j.ejor.2018.03.015,
author = {Brigo, D and Vrins, F},
doi = {10.1016/j.ejor.2018.03.015},
journal = {European Journal of Operational Research},
pages = {1154--1164},
title = {Disentangling wrong-way risk: pricing credit valuation adjustment via change of measures},
url = {http://dx.doi.org/10.1016/j.ejor.2018.03.015},
volume = {269},
year = {2018}
}

RIS format (EndNote, RefMan)

TY  - JOUR
AB - In many financial contracts (and in particular when trading OTC derivatives), participantsare exposed to counterparty risk. The latter is typically rewarded by adjusting the “risk-freeprice” of derivatives; an adjustment known ascredit value adjustment(CVA). A key driverof CVA is the dependency between exposure and counterparty risk, known aswrong-way risk(WWR). In practice however, correctly addressing WWR is very challenging and calls forheavy numerical techniques. This might explain why WWR is not explicitly handled in theBasel III regulatory framework in spite of its acknowledged importance. In this paper wepropose a sound and tractable method to deal efficiently with WWR. Our approach consistsof embedding the WWR effect in the drift of the exposure dynamics. Even though thiscalls for infinite changes of measures, we end up with an appealing compromise betweentractability and mathematical rigor, preserving the level of accuracy typically required forCVA figures. The good performances of the method are discussed in a stochastic-intensitydefault setup based on extensive comparisons of Expected Positive Exposure (EPE) profilesand CVA figures produced (i) by a full bivariate Monte Carlo implementation of the initialmodel with (ii) our drift-adjustment technique.
AU - Brigo,D
AU - Vrins,F
DO - 10.1016/j.ejor.2018.03.015
EP - 1164
PY - 2018///
SN - 0377-2217
SP - 1154
TI - Disentangling wrong-way risk: pricing credit valuation adjustment via change of measures
T2 - European Journal of Operational Research
UR - http://dx.doi.org/10.1016/j.ejor.2018.03.015
UR - http://hdl.handle.net/10044/1/57877
VL - 269
ER -