Coherent Global Market Simulations and Securitization Measures for Counterparty Credit Risk

27 Pages Posted: 18 May 2011

See all articles by Claudio Albanese

Claudio Albanese

Global Valuation; CASS School of Business

Giacomo Pietronero

Global Valuation Ltd

Date Written: October 20, 2010

Abstract

Valuing, hedging and securitizing counterparty credit risk involves analyzing large portfolios of netting sets over time horizons spanning decades. Theory dictates that the simulation measure should be coherent, i.e. arbitrage free. It should also be used consistently both to simulate and to value all instruments.

This article describes the Mathematics and the software architecture of a risk system that accomplishes this task. The usage pattern is based on an offline phase to calibrate and generate model libraries. Valuation and simulation algorithms are planned offline with portfolio specific optimizations. The interactive user-driven phase includes a coherent global market simulation taking a few minutes and a real time data exploration phase with response time below 10 seconds.

Data exploration includes 3-dimensional risk visualization of portfolio loss distributions and sensitivities. It also includes risk resolution capability for outliers from the global portfolio level down to the single instrument level and hedge ratio optimization. The network bottleneck is bypassed by using heterogeneous boards with acceleration. The memory bottleneck is avoided at the algorithmic level by adapting the mathematical framework to revolve around a handful of compute-bound algorithms.

Keywords: counterparty credit risk, cva, global market simulations, swaps

Suggested Citation

Albanese, Claudio and Pietronero, Giacomo, Coherent Global Market Simulations and Securitization Measures for Counterparty Credit Risk (October 20, 2010). Available at SSRN: https://ssrn.com/abstract=1844711 or http://dx.doi.org/10.2139/ssrn.1844711

Claudio Albanese (Contact Author)

Global Valuation ( email )

9 Devonshire Sq.
London, London EC2M 4YF
United Kingdom

CASS School of Business ( email )

106 Bunhill Row
London, England EC1Y 8TZ
United Kingdom

Giacomo Pietronero

Global Valuation Ltd ( email )

9 Devonshire Square
London, EC2M 4YF
United Kingdom

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