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Wrong-way risk bounds in counterparty credit risk management

Author

Listed:
  • Memartoluie, Amir
  • Saunders, David
  • Wirjanto, Tony

Abstract

We study the problem of finding the worst-case joint distribution of a set of risk factors given prescribed multivariate marginals and a non-linear loss function. We show that when the risk measure is conditional value-at-risk (CVaR), and the distributions are discretised, the problem can be conveniently solved using linear programming. The method has applications to any situation where marginals are provided and bounds need to be determined on total portfolio risk. In this paper, we emphasise applications to counterparty credit risk including the assessment of wrong-way risk. A suitable algorithm for counterparty risk measurement of a real portfolio is also presented.

Suggested Citation

  • Memartoluie, Amir & Saunders, David & Wirjanto, Tony, 2017. "Wrong-way risk bounds in counterparty credit risk management," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 10(2), pages 150-163, April.
    • Handle: RePEc:aza:rmfi00:y:2017:v:10:i:2:p:150-163
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    More about this item

    Keywords

    counterparty credit risk; CVaR; Basel III; linear programming; risk management; distributions with given marginals;
    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

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