Related papers: Restructuring Counterparty Credit Risk
In this paper, we deal with an axiomatic approach to default risk. We introduce the notion of a default risk measure, which generalizes the classical probability of default (PD), and allows to incorporate model risk in various forms. We…
The valuation of over-the-counter derivatives is subject to a series of valuation adjustments known as xVA, which pose additional risks for financial institutions. Associated risk measures, such as the value-at-risk of an underlying…
A new chaotic financial system is proposed by considering ethics involvement in a four-dimensional financial system with market confidence. A five-dimensional conformable derivative financial system is presented by introducing conformable…
The paper studies derivative asset analysis in structural credit risk models where the asset value of the firm is not fully observable. It is shown that in order to compute the price dynamics of traded securities one needs to solve a…
In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. Here XVA is a catch-all acronym whereby X is replaced by a letter such as…
In this paper, we present a novel computational framework for portfolio-wide risk management problems, where the presence of a potentially large number of risk factors makes traditional numerical techniques ineffective. The new method…
We propose a unified structural credit risk model incorporating both insolvency and illiquidity risks, in order to investigate how a firm's default probability depends on the liquidity risk associated with its financing structure. We assume…
We discuss and clarify the XVA modelling framework specified in the paper "MVA by replication and regression" (Risk Magazine, May 2015) for including bilateral credit risk and funding costs in derivative pricing, and in doing so we rectify…
During recent years the counterparty risk subject has received a growing attention because of the so called Basel Accord. In particular the Basel III Accord asks the banks to fulfill finer conditions concerning counterparty credit exposures…
We set up a structural model to study credit risk for a portfolio containing several or many credit contracts. The model is based on a jump--diffusion process for the risk factors, i.e. for the company assets. We also include correlations…
We consider the framework proposed by Burgard and Kjaer (2011) that derives the PDE which governs the price of an option including bilateral counterparty risk and funding. We extend this work by relaxing the assumption of absence of…
We analyze the systemic risk for disjoint and overlapping groups (e.g., central clearing counterparties (CCP)) by proposing new models with realistic game features. Specifically, we generalize the systemic risk measure proposed in [F.…
The lifetime behaviour of loans is notoriously difficult to model, which can compromise a bank's financial reserves against future losses, if modelled poorly. Therefore, we present a data-driven comparative study amongst three techniques in…
The existence of asymmetric information has always been a major concern for financial institutions. Financial intermediaries such as commercial banks need to study the quality of potential borrowers in order to make their decision on…
Changes in collateralization have been implicated in significant default (or near-default) events during the financial crisis, most notably with AIG. We have developed a framework for quantifying this effect based on moving between…
This paper considers mutual obligations in the interconnected bank system and analyzes their influence on joint and marginal survival probabilities as well as CDS and FTD prices for the individual banks. To make the role of mutual…
This paper provides a mathematical framework based on the principle of invariance to classify institutions in two paradigms according to the way in which credit, debit and funding adjustments are calculated: accounting and management…
We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted…
A standard quantitative method to access credit risk employs a factor model based on joint multivariate normal distribution properties. By extending a one-factor Gaussian copula model to make a more accurate default forecast, this paper…
The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beale et al. ("Individual versus systemic risk and the regulator's dilemma", Proc Natl Acad…