Funding and Credit Risk with Locally Elliptical Portfolio Processes: An Application to CCPs

42 Pages Posted: 29 Apr 2018

Date Written: April 11, 2018


We consider the problem of quantifying credit and funding risks in the presence of initial margin calculated by dynamically updated risk measures, such as Value-at-Risk and Expected Shortfall. The analytic scaling approach proposed in Andersen et al. [2] is generalized from a system driven by Brownian motion to an arbitrary radially symmetric (or ‘isotropic’) Lévy process, permitting application to models possessing fat-tailed market movements during the margin period of risk (MPoR). Our mathematical results are applied to derive a closed-form representation for the credit valuation adjustment (CVA) and margin valuation adjustment (MVA) for centrally cleared portfolios in an arbitrage-free, continuous-time model driven by an isotropic Lévy process. Our results cover both the exposures arising from client clearing and from participation in the loss mutualization of clearing member defaults. The latter is a particularly vexing modeling problem due to strong limitations on observable CCP data; our model gives rise to a compact valuation expression depending only on a clearing member’s own portfolio, and certain intuitive macroscopic measures capturing the gross risk and its concentration within the CCP.

Keywords: Central Clearing, CCP, Fat Tailed Processes, Initial Margin, CVA, MVA

JEL Classification: C63, G12, G13, G23

Suggested Citation

Andersen, Leif B.G. and Dickinson, Andrew Samuel, Funding and Credit Risk with Locally Elliptical Portfolio Processes: An Application to CCPs (April 11, 2018). Available at SSRN: or

Leif B.G. Andersen (Contact Author)

Bank of America Merrill Lynch ( email )

One Bryant Park
New York, NY 10036
United States
646-855-1835 (Phone)

Andrew Samuel Dickinson

Bank of America ( email )

2 King Edward Street
London, EC1A 1HQ
United Kingdom

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics