CORE (room b-135)
Integrated Structural Approach to Counterparty Credit Risk with Dependent Jumps
Laura Ballotta, Cass Business School
This paper proposes an integrated pricing framework for CVA of equity and commoditiy products. The given framework, in fact, generates dependence endogenously, allows for calibration and pricing to be based on the same numerical schemes (up to Monte Carlo simulation), and also naturally allows the inclusion of risk mitigation clauses such as netting, collateral and initial margin provisions. The model is based on a structural approach which uses correlated Lévy processes with idiosyncratic and systematic components; the pricing numerical scheme, instead, efficiently combines Monte Carlo simulation and Fourier transform based methods. We illustrate the tractability and the performance of the proposed numerical scheme, and analyse the effects originated by right-way and wrong-way risk under different assumptions related to the parameters controlling collateral and netting agreements. A case study on a portfolio of commodity swaps using real market data is considered.
This is joint work with Gianluca Fusai and Daniele Marazzina.