Yes / Following the global financial crisis, the measurement of counterparty credit risk has become
an essential part of the Basel III accord with credit value adjustment being one of the most
prominent components of this concept. In this study, we extend the Merton structural credit
risk model for counterparty credit risk calculation in the context of calculating the credit value
adjustment mainly by estimating the probability of default. We improve the Merton model in a
variance-convoluted-gamma environment to include default dependence between counterparties
through a linear factor decomposition framework. This allows one to tackle dependence through
a systematic common component. Our set-up allows for easier, faster and more accurate fitting
for the credit spread. Results confirm that use of the variance-gamma-convolution clearly solves
the vanishing credit spread problem for short time-to-maturity or low leverage cases compared
to a Brownian motion environment and its modifications. / Ahmet Sensoy gratefully acknowledges support from Turkish Academy of Sciences under its Outstanding
Young Scientist Award Programme (TUBA-GEBIP). Frank J. Fabozzi acknowledges the financial support
from EDHEC Business School.
| Identifer | oai:union.ndltd.org:BRADFORD/oai:bradscholars.brad.ac.uk:10454/19383 |
| Date | 22 March 2023 |
| Creators | Akyildirim, Erdinc, Hekimoglu, A.A., Sensoy, A., Fabozzi, F.J. |
| Source Sets | Bradford Scholars |
| Language | English |
| Detected Language | English |
| Type | Article, Accepted manuscript |
| Rights | © The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2023. This version of the article has been accepted for publication, after peer review (when applicable) and is subject to Springer Nature’s AM terms of use, but is not the Version of Record and does not reflect post-acceptance improvements, or any corrections. The Version of Record is available online at: https://doi.org/10.1007/s10479-023-05289-3., Unspecified |
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