IDEAS home Printed from https://ideas.repec.org/a/aza/rmfi00/y2015v8i4p390-404.html
   My bibliography  Save this article

CVA wrong way risk multiplier decomposition and efficient CVA curve

Author

Listed:
  • Pang, Tao
  • Chen, Wei
  • Li, Le

Abstract

Credit value adjustment (CVA) is an adjustment added to the fair value of an over-thecounter trade due to the counterparty risk. When the exposure to the counterparty changes in the same direction as the counterparty default risk the so-called wrong-way-risk (WWR) must be taken into account. Calculating CVA with WWR has been a computationally challenging task, especially because it has to be done frequently. In this paper, we start with the fact that the ratio of CVA with WWR to CVA under the independent exposure and default assumption depends on the means and standard deviations of exposure and default probability and their linear correlation. The CVA WWR ratio is then decomposed into two factors, a robust correlation and a profile multiplier with further economic insight into the CVA WWR ratio. The distribution free approach in this paper entails an efficient algorithm of curve-based CVA WWR calculation. A numerical study illustrates the algorithm and its benefits.

Suggested Citation

  • Pang, Tao & Chen, Wei & Li, Le, 2015. "CVA wrong way risk multiplier decomposition and efficient CVA curve," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 8(4), pages 390-404, October.
    • Handle: RePEc:aza:rmfi00:y:2015:v:8:i:4:p:390-404
    as

    Download full text from publisher

    File URL: https://hstalks.com/article/1771/download/
    Download Restriction: Requires a paid subscription for full access.
    File URL: https://hstalks.com/article/1771/
    Download Restriction: Requires a paid subscription for full access.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    credit value adjustment; CVA; wrong-way-risk; WWR;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aza:rmfi00:y:2015:v:8:i:4:p:390-404. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Henry Stewart Talks (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.