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

@inproceedings{Brigo,
author = {Brigo, D and Pede, N and Petrelli, A},
publisher = {World Scientific Press},
title = {Examples of wrong–way risk in CVA induced by devaluations on default},
url = {http://hdl.handle.net/10044/1/58306},
}

RIS format (EndNote, RefMan)

TY  - CPAPER
AB - When calculatingCredit Valuation Adjustment(CVA), theinteraction between the portfolio’s exposure and the counter-party’s credit worthiness is referred to asWrong–Way Risk(WWR). Making the assumption that the Brownian mo-tions driving both the market (exposure) and the (counter-party) credit risk–factors dynamics are correlated representsthe simplest way of modelling the dependence structure be-tween these two components. For many practical applica-tions, however, such an approach may fail to account for theright amount of WWR, thus resulting in misestimates of theportfolio’s CVA. We present a modelling framework wherea further — and indeed stronger — source of market/creditdependence is introduced through devaluation jumps on themarket risk–factors’ dynamics. Such jumps happen upon thecounterparty’s default and are a particularly realistic featureto include in case of sovereign or systemically important coun-terparties. Moreover, we show that, in the special case wherethe focus is on FX/credit WWR, devaluation jumps provide an effective way of incorporating market information comingfrom quanto Credit Default Swap (CDS) basis spreads and wederive the corresponding CVA pricing equations as a systemof coupled PDEs.
AU - Brigo,D
AU - Pede,N
AU - Petrelli,A
PB - World Scientific Press
TI - Examples of wrong–way risk in CVA induced by devaluations on default
UR - http://hdl.handle.net/10044/1/58306
ER -