Jumping with default: wrong-way risk modelling for CVA

Fabio Mercurio and Minqiang Li investigate CVAs in the presence of wrong-way risk

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Credit valuation adjustment (CVA) is widely recognised as one of the most important credit risk measures by industry practitioners and regulators. Traditional CVA calculations were – and to a great extent still are – based on an assumption of independence between default and market risk factors. However, there has been a growing consensus that wrong-way risk (WWR) should also be taken into account.WWR is defined as the event that occurs when exposure to a counterparty is adversely correlated

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Credit risk & modelling – Special report 2021

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