Toward a Better Estimation of WrongWay Credit Exposure

Toward a Better Estimation of WrongWay Credit Exposure In counterparty credit risk management for swaps, forwards, and other derivative contracts, it is recognized that most common applications of credit exposure measurement suffer from the bias that counterparty default is independent of the amount of exposure. Stress tests are often proposed to compensate for this bias, but these measures tend to be arbitrary and cannot be uniformly applied to setting prices and limits as readily as more standardized approaches. The author proposes a framework in which standard measures of counterparty exposure are conditioned on default probabilities. These conditional measures thus account for rong way exposures, but fit naturally into current applications. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Toward a Better Estimation of WrongWay Credit Exposure

The Journal of Risk Finance, Volume 1 (3): 9 – Feb 1, 2000

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1526-5943
DOI
10.1108/eb043447
Publisher site
See Article on Publisher Site

Abstract

In counterparty credit risk management for swaps, forwards, and other derivative contracts, it is recognized that most common applications of credit exposure measurement suffer from the bias that counterparty default is independent of the amount of exposure. Stress tests are often proposed to compensate for this bias, but these measures tend to be arbitrary and cannot be uniformly applied to setting prices and limits as readily as more standardized approaches. The author proposes a framework in which standard measures of counterparty exposure are conditioned on default probabilities. These conditional measures thus account for rong way exposures, but fit naturally into current applications.

Journal

The Journal of Risk FinanceEmerald Publishing

Published: Feb 1, 2000

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