1. Counterparty Risk: A Review
- Author
-
Stuart M. Turnbull
- Subjects
Economics and Econometrics ,Actuarial science ,Collateral ,business.industry ,media_common.quotation_subject ,jel:G20 ,jel:G01 ,jel:G13 ,Loss given default ,Copula (probability theory) ,jel:G28 ,counterparty risk, CVA, DVA, CCP ,Debt ,Economics ,Credit valuation adjustment ,Marginal distribution ,business ,Finance ,Risk management ,media_common ,Credit risk - Abstract
This review provides formal definitions of the terms credit value adjustment (CVA) and debt value adjustment (DVA). Estimating these quantities requires modeling the probabilities of default and the loss given default, recognizing the dependence structure among all these inputs. In practice, marginal distributions are used and a copula function assumed. Although it has long been known that different copula functions can produce very different price estimates, keeping marginal distributions constant, there is little empirical evidence about the appropriate form of function to use for modeling default dependence. This review discusses the use of collateral for risk mitigation and its effects on CVA. Regulators have argued that standardized contracts should be cleared through central counterparties (CCPs). However, there are arguments against CCPs.
- Published
- 2014
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