Figure 4 - uploaded by Dorinel Bastide
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CCVA and KVA w.r.t. credit factors correlation and credit and portfolio variation factors correlation.
Contexts in source publication
Context 1
... mkt . The correlation ρ wwr has more impact than ρ cr and ρ mkt (right panels in Figures 4 and 5). As seen on the left panels of Figures 4 and 5, there are very marginal changes for the aggregated CCVA w.r.t. ...
Context 2
... mkt . The correlation ρ wwr has more impact than ρ cr and ρ mkt (right panels in Figures 4 and 5). As seen on the left panels of Figures 4 and 5 Table 7: Member characteristics and portfolio parameters, ordered by decreasing member size. ...
Citations
... When a clearing member defaults, the CCP can hedge and auction or liquidate its positions. The counterparty credit risk cost of auctioning has been analyzed in terms of XVA metrics in Bastide, Crépey, Drapeau, and Tadese (2023). In this work we assess the costs of hedging or liquidating. ...
... If a clearing member d defaults, its client deals and their static hedge are ported as a package to a surviving clearing member (right panel in Figure 2). As market risk is perfectly hedged throughout, such porting has no market impact, but entails a transfer of counterparty credit risk that can be quantified by XVA costs as per Bastide et al. (2023, Section 7) (second row in Table 11). ...
... The purpose of this part is to provide a bridge from the equilibrium setup of Sections 2-5 to the XVA setup of Bastide et al. (2023), so that we are able to provide an overall FTP (6.3) quantifying the market but also credit costs of a given default resolution strategy. We leave for future research the extension of the approach of this paper to a setup where not only the market costs, but also the credit costs, would be treated endogenously as part of a global (or perhaps two-stage 16 ) equilibrium, ideally in the setup of a dynamic model. ...
For vanilla derivatives that constitute the bulk of investment banks' hedging portfolios, central clearing through central counterparties (CCPs) has become hegemonic. A key mandate of a CCP is to provide an efficient and proper clearing member default resolution procedure. When a clearing member defaults, the CCP can hedge and auction or liquidate its positions. The counterparty credit risk cost of auctioning has been analyzed in terms of XVA metrics in Bastide, Cr{é}pey, Drapeau, and Tadese (2023). In this work we assess the costs of hedging or liquidating. This is done by comparing pre- and post-default market equilibria, using a Radner equilibrium approach for portfolio allocation and price discovery in each case. We show that the Radner equilibria uniquely exist and we provide both analytical and numerical solutions for the latter in elliptically distributed markets. Using such tools, a CCP could decide rationally on which market to hedge and auction or liquidate defaulted portfolios.
