Bilateral Credit Valuation Adjustment for Large Credit Derivatives Portfolios
Pricing of Securities
2013-05-27 v1
Abstract
We obtain an explicit formula for the bilateral counterparty valuation adjustment of a credit default swaps portfolio referencing an asymptotically large number of entities. We perform the analysis under a doubly stochastic intensity framework, allowing for default correlation through a common jump process. The key insight behind our approach is an explicit characterization of the portfolio exposure as the weak limit of measure-valued processes associated to survival indicators of portfolio names. We validate our theoretical predictions by means of a numerical analysis, showing that counterparty adjustments are highly sensitive to portfolio credit risk volatility as well as to default correlation.
Keywords
Cite
@article{arxiv.1305.5575,
title = {Bilateral Credit Valuation Adjustment for Large Credit Derivatives Portfolios},
author = {Lijun Bo and Agostino Capponi},
journal= {arXiv preprint arXiv:1305.5575},
year = {2013}
}