{"title":"A Copula Approach to Credit Valuation Adjustment for Swaps Under Wrong-Way Risk","authors":"Jakub Černý, J. Witzany","doi":"10.21314/JCR.2017.234","DOIUrl":null,"url":null,"abstract":"This paper deals with the credit valuation adjustment (CVA) of interest rate swap (IRS) contracts in the presence of an adverse dependence between the default time and interest rates: so-called wrong-way risk (WWR). It compares the upper Frechet bound approach introduced in a 2013 paper by Umberto Cherubini with a new semi-analytical IRS–CVA formula that we are proposing as a modification of Cherubini’s approach. The approaches are compared via a numerical study, in which we find that our semianalytical formula (the modified approach) provides more precise IRS–CVA valuation results.","PeriodicalId":44244,"journal":{"name":"Journal of Credit Risk","volume":"10 1","pages":""},"PeriodicalIF":0.3000,"publicationDate":"2018-02-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"3","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Credit Risk","FirstCategoryId":"96","ListUrlMain":"https://doi.org/10.21314/JCR.2017.234","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"Economics, Econometrics and Finance","Score":null,"Total":0}
引用次数: 3
Abstract
This paper deals with the credit valuation adjustment (CVA) of interest rate swap (IRS) contracts in the presence of an adverse dependence between the default time and interest rates: so-called wrong-way risk (WWR). It compares the upper Frechet bound approach introduced in a 2013 paper by Umberto Cherubini with a new semi-analytical IRS–CVA formula that we are proposing as a modification of Cherubini’s approach. The approaches are compared via a numerical study, in which we find that our semianalytical formula (the modified approach) provides more precise IRS–CVA valuation results.
期刊介绍：
With the re-writing of the Basel accords in international banking and their ensuing application, interest in credit risk has never been greater. The Journal of Credit Risk focuses on the measurement and management of credit risk, the valuation and hedging of credit products, and aims to promote a greater understanding in the area of credit risk theory and practice. The Journal of Credit Risk considers submissions in the form of research papers and technical papers, on topics including, but not limited to: Modelling and management of portfolio credit risk Recent advances in parameterizing credit risk models: default probability estimation, copulas and credit risk correlation, recoveries and loss given default, collateral valuation, loss distributions and extreme events Pricing and hedging of credit derivatives Structured credit products and securitizations e.g. collateralized debt obligations, synthetic securitizations, credit baskets, etc. Measuring managing and hedging counterparty credit risk Credit risk transfer techniques Liquidity risk and extreme credit events Regulatory issues, such as Basel II, internal ratings systems, credit-scoring techniques and credit risk capital adequacy.
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