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Counterparty risk and funding: immersion and beyond

Author

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  • Stéphane Crépey

    (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - INRA - Institut National de la Recherche Agronomique - UEVE - Université d'Évry-Val-d'Essonne - ENSIIE - CNRS - Centre National de la Recherche Scientifique)

  • Shiqi Song

    (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - INRA - Institut National de la Recherche Agronomique - UEVE - Université d'Évry-Val-d'Essonne - ENSIIE - CNRS - Centre National de la Recherche Scientifique)

Abstract

In Crépey [9], a basic reduced-form counterparty risk modelling approach was introduced under a standard immersion hypothesis between a reference filtration and the filtration progressively enlarged by the default times of the two parties. This basic setup, with a related continuity assumption on some of the data at the first default time of the two parties, is too restrictive for wrong-way and gap risk applications, such as counterparty risk on credit derivatives. This paper introduces an extension of the basic approach, implements it through marked default times and applies it to counterparty risk on credit derivatives.

Suggested Citation

  • Stéphane Crépey & Shiqi Song, 2018. "Counterparty risk and funding: immersion and beyond," Working Papers hal-01764403, HAL.
  • Handle: RePEc:hal:wpaper:hal-01764403
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01764403
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    References listed on IDEAS

    as
    1. Akihiko Takahashi & Toshihiro Yamada, 2015. "An Asymptotic Expansion of Forward-Backward SDEs with a Perturbed Driver," CARF F-Series CARF-F-363, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Masaaki Fujii, Akihiko Takahashi, 2012. "Analytical Approximation for Non-linear FBSDEs with Perturbation Scheme," CARF F-Series CARF-F-269, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Masaaki Fujii & Akihiko Takahashi, 2015. "Asymptotic Expansion for Forward-Backward SDEs with Jumps," Papers 1510.03220, arXiv.org, revised Sep 2018.
    4. Tomasz R. Bielecki & Areski Cousin & Stéphane Crépey & Alexander Herbertsson, 2014. "Dynamic Hedging of Portfolio Credit Risk in a Markov Copula Model," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 90-102, April.
    5. Masaaki Fujii & Akihiko Takahashi, 2015. "Asymptotic Expansion for Forward-Backward SDEs with Jumps," CIRJE F-Series CIRJE-F-993, CIRJE, Faculty of Economics, University of Tokyo.
    6. Masaaki Fujii & Akihiko Takahashi, 2011. "Analytical Approximation for Non-linear FBSDEs with Perturbation Scheme," Papers 1106.0123, arXiv.org, revised Jan 2012.
    7. Akihiko Takahashi & Toshihiro Yamada, 2015. "An asymptotic expansion of forward-backward SDEs with a perturbed driver," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(02), pages 1-29.
    8. Stéphane Crépey & Rémi Gerboud & Zorana Grbac & Nathalie Ngor, 2013. "Counterparty Risk And Funding: The Four Wings Of The Tva," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(02), pages 1-31.
    9. Masaaki Fujii & Akihiko Takahashi, 2012. "ANALYTICAL APPROXIMATION FOR NON-LINEAR FBSDEs WITH PERTURBATION SCHEME," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(05), pages 1-24.
    10. Bo, Lijun & Capponi, Agostino, 2015. "Counterparty risk for CDS: Default clustering effects," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 29-42.
    11. Akihiko Takahashi & Toshiaki Watanabe, 2015. "An Asymptotic Expansion of Forward-Backward SDEs with a Perturbed Driver ," CIRJE F-Series CIRJE-F-976, CIRJE, Faculty of Economics, University of Tokyo.
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    More about this item

    Keywords

    Credit derivatives; Collateral; Gap risk; Wrong-way risk; Immersion; Reduced-form credit modelling; BSDE; Funding; Counterparty risk;
    All these keywords.

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