Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Counterparty Risk: A Review

Counterparty Risk: A Review 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annual Review of Financial Economics Annual Reviews

Loading next page...
 
/lp/annual-reviews/counterparty-risk-a-review-x7YWhvmNbG
Publisher
Annual Reviews
Copyright
Copyright © 2014 by Annual Reviews. All rights reserved
ISSN
1941-1367
eISSN
1941-1375
DOI
10.1146/annurev-financial-110613-034515
Publisher site
See Article on Publisher Site

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.

Journal

Annual Review of Financial EconomicsAnnual Reviews

Published: Dec 1, 2014

There are no references for this article.