Integrated Structural Approach to Counterparty Credit Risk with Dependent Jumps

Ballotta, L., Fusai, G. & Marazzina, D. (2015). Integrated Structural Approach to Counterparty Credit Risk with Dependent Jumps. City University.

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Abstract

This paper proposes an integrated pricing framework for CVA: the model is based on a structural approach which uses correlated Lévy processes with idiosyncratic and systematic components; the numerical scheme, instead, efficiently combines Monte Carlo simulation and Fourier transform based methods. The framework is sufficiently flexible in incorporating a number of mitigating clauses, such as netting and collateral provisions. We illustrate the tractability and the performance of the proposed numerical scheme, and analyse the effects originated by right-way and wrong-way risk under different assumptions related to the parameters controlling collateral and netting agreements.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Counterparty Credit Risk, CVA, Collateral, Dependence, Gap Risk, Lévy processes, Netting
Subjects: H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
URI: http://openaccess.city.ac.uk/id/eprint/16272

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