Jumping with Default: Wrong-Way-Risk Modeling for Credit Valuation Adjustment

33 Pages Posted: 14 May 2015 Last revised: 23 Aug 2016

Date Written: August 22, 2016

Abstract

We investigate credit value adjustments (CVAs) in the presence of wrong-way risk (WWR) by introducing jumps at default to model correlation between counterparty's default and relevant risk factors. We focus on the foreign-exchange and interest-rate cases, presenting efficient CVA approximations based on CVA computation under independence assumption. Numerical examples of the CVAs of a cross-currency swap and a vanilla interest-rate swap are showcased.

Keywords: Wrong-way risk; Credit value adjustment; jump diffusion model; default

JEL Classification: G10; G12; G18; C60

Suggested Citation

Li, Minqiang and Mercurio, Fabio, Jumping with Default: Wrong-Way-Risk Modeling for Credit Valuation Adjustment (August 22, 2016). Available at SSRN: https://ssrn.com/abstract=2605648 or http://dx.doi.org/10.2139/ssrn.2605648

Minqiang Li (Contact Author)

Bloomberg LP ( email )

731 Lexington Avenue
New York, NY 10022
United States

Fabio Mercurio

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
682
Abstract Views
2,366
rank
44,987
PlumX Metrics