Cutting CVA's complexity

Calculating credit value adjustments can be very numerically intensive, often involving nested Monte Carlo simulations. Pierre Henry-Labordère uses marked branching diffusions to construct an efficient algorithm based on a Galton-Watson random tree, to dramatically reduce computational costs

lego model

The recent financial crisis has highlighted the importance of the credit value adjustment (CVA) when pricing derivatives. Bilateral counterparty risk is the risk that the issuer of a derivative, or its counterparty, may default prior to the expiry and fail to make future payments. For Markovian models, this leads naturally to non-linear second-order parabolic partial differential equations (PDEs) to price the contract. More precisely, the non-linearity in the pricing equation affects none of the

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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