Jumping with default: wrong-way risk modelling for CVA

Fabio Mercurio and Minqiang Li investigate credit valuation adjustments (CVAs) in the presence of wrong-way risk by introducing jumps at default to model the correlation between counterparty default and relevant risk factors. Efficient approximations based on CVA formulas with the independence assumption are presented, and numerical examples for a cross-currency swap and a vanilla interest rate swap are showcased


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

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

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…

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here