Bilateral credit valuation adjustment for large credit derivatives portfolios |
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Authors: | Lijun Bo Agostino Capponi |
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Institution: | 1. Department of Mathematics, Xidian University, Xi’an, 710071, China 2. Department of Applied Mathematics, Johns Hopkins University, Baltimore, MD, 21218-2682, USA
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Abstract: | We obtain an explicit formula for the bilateral counterparty valuation adjustment of a credit default swaps portfolio referencing an asymptotically large number of entities. We perform the analysis under a doubly stochastic intensity framework, allowing default correlation through a common jump process. The key insight behind our approach is an explicit characterization of the portfolio exposure as the weak limit of measure-valued processes associated with survival indicators of portfolio names. We validate our theoretical predictions by means of a numerical analysis, showing that counterparty adjustments are highly sensitive to portfolio credit risk volatility as well as to the intensity of the common jump process. |
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