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Wrong Way Risk corrections to CVA in CIR reduced-form models

Author

Listed:
  • Fabio Antonelli

    (University of L’Aquila)

  • Alessandro Ramponi

    (University of Rome Tor Vergata)

  • Sergio Scarlatti

    (University of Rome Tor Vergata)

Abstract

In this paper we provide an efficient methodology to compute the credit value adjustment of a European contingent claim subject to some default event concerning the issuer solvability, when the underlying and the default event are correlated. In particular, in a Black and Scholes market/CIR intensity-default model, we consider a second order expansion around the origin of a vulnerable call option with respect to a correlation parameter $$\rho$$ ρ , which may be used to describe the wrong way risk of the contract, measuring the dependence between the underlying asset price and the option’s issuer default intensity. Numerical implementations of this approach are compared with the benchmark Monte Carlo simulations.

Suggested Citation

  • Fabio Antonelli & Alessandro Ramponi & Sergio Scarlatti, 2023. "Wrong Way Risk corrections to CVA in CIR reduced-form models," Computational Management Science, Springer, vol. 20(1), pages 1-28, December.
    • Handle: RePEc:spr:comgts:v:20:y:2023:i:1:d:10.1007_s10287-023-00480-0
    DOI: 10.1007/s10287-023-00480-0
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