Worst-Case Copulas, Mass Transportation and Wrong-Way Risk in Counterparty Credit Risk Management
Posted: 31 Mar 2013
Date Written: March 28, 2013
We study the problem of finding the worst-case joint distribution of a set of risk factors given prescribed multivariate marginals with nonlinear loss function. The method has applications to any situation where marginals are provided, and bounds need to be determined on total portfolio risk. This arises in many financial contexts, including pricing and risk management of exotic options, analysis of structured finance instruments, and aggregation of portfolio risk across risk types. Applications to counterparty credit risk are highlighted, and include assessing wrong-way risk in the credit valuation adjustment, and counterparty credit risk measurement.
Keywords: Conterparty Credit Risk, Wrong-way Risk, Mass Transportation
JEL Classification: C61, G11, G21, G22
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