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Counterparty Risk Valuation: A Marked Branching Diffusion Approach

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  • Pierre Henry-Labordere

    (SOCIETE GENERALE - Equity Derivatives Research Societe Generale - Société Générale)

Abstract

The purpose of this paper is to design an algorithm for the computation of the counterparty risk which is competitive in regards of a brute force ''Monte-Carlo of Monte-Carlo" method (with nested simulations). This is achieved using marked branching diffusions describing a Galton-Watson random tree. Such an algorithm leads at the same time to a computation of the (bilateral) counterparty risk when we use the default-risky or counterparty-riskless option values as mark-to-market. Our method is illustrated by various numerical examples.

Suggested Citation

  • Pierre Henry-Labordere, 2012. "Counterparty Risk Valuation: A Marked Branching Diffusion Approach," Working Papers hal-00677348, HAL.
    • Handle: RePEc:hal:wpaper:hal-00677348
    Note: View the original document on HAL open archive server: https://hal.science/hal-00677348
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/5524 is not listed on IDEAS
    2. Leif Andersen & Mark Broadie, 2004. "Primal-Dual Simulation Algorithm for Pricing Multidimensional American Options," Management Science, INFORMS, vol. 50(9), pages 1222-1234, September.
    3. L. C. G. Rogers, 2002. "Monte Carlo valuation of American options," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 271-286, July.
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    Cited by:

    1. S'ebastien Geeraert & Charles-Albert Lehalle & Barak Pearlmutter & Olivier Pironneau & Adil Reghai, 2017. "Mini-symposium on automatic differentiation and its applications in the financial industry," Papers 1703.02311, arXiv.org, revised Jun 2017.

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    More about this item

    Keywords

    Counterparty risk valuation; BSDE; branching diffusions; semi-linear PDE; Galton-Watson tree;
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