Path-consistent wrong-way risk

In this paper, Klaus Böcker and Michael Brunnbauer define a general copula wrong-way risk (WWR) model and show how different copulas affect results such as potential future exposure and credit valuation adjustment figures. They present a very general model that respects the pathwise structure of future exposure and reconciles different existing models under the same framework

U-turn

In the context of counterparty credit risk management and the computation of credit valuation adjustments (CVAs), the correct inclusion of wrong-way risk (WWR) is still a major concern for bank managers and regulators. According to the International Swaps and Derivatives Association, WWR can be defined as the risk that occurs when ‘the exposure to a counterparty is adversely correlated with the credit quality of that counterparty'. Here, we focus on general WWR, ie, the unspecific positive

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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