Counterparty Risk Valuation: A Marked Branching Diffusion Approach
Computational Finance
2012-03-13 v1
Abstract
The purpose of this paper is to design an algorithm for the computation of the counterparty risk which is competitive in regards of a brute force "Monte-Carlo of Monte-Carlo" method (with nested simulations). This is achieved using marked branching diffusions describing a Galton-Watson random tree. Such an algorithm leads at the same time to a computation of the (bilateral) counterparty risk when we use the default-risky or counterparty-riskless option values as mark-to-market. Our method is illustrated by various numerical examples.
Cite
@article{arxiv.1203.2369,
title = {Counterparty Risk Valuation: A Marked Branching Diffusion Approach},
author = {Pierre Henry-Labordere},
journal= {arXiv preprint arXiv:1203.2369},
year = {2012}
}