Li, Hui (2009): Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery.
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Current CVA modeling framework has ignored the impact of stochastic recovery rate. Due to the possible negative correlation between default and recovery rate, stochastic recovery rate could have a doubling effect on wrong-way risk. In the case of a payer CDS, when counterparty defaults, the CDS value could be higher due to default contagion while the recovery rate may also be lower if the economy is in a downturn. Using our recently proposed model of correlated stochastic recovery in the default time Gaussian Copula framework, we demonstrate this double impact on wrong-way risk in the CVA calculation for a payer CDS. We also present a new form of Gaussian copula that correlates both default time and recovery rate.
|Item Type:||MPRA Paper|
|Original Title:||Double Impact on CVA for CDS: Wrong-Way Risk with Stochastic Recovery|
|Keywords:||Counterparty Risk, Credit Valuation Adjustment, Wrong-Way Risk, Default Time Copula, Gaussian Copula, Default Correlation, Stochastic Recovery, Spot Recovery, Credit Default Swap|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing|
|Depositing User:||Hui Li|
|Date Deposited:||05. Jan 2010 11:34|
|Last Modified:||26. Feb 2013 06:40|
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