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Distributionally Robust XVA via Wasserstein Distance: Wrong Way Counterparty Credit and Funding Risk

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  • Derek Singh
  • Shuzhong Zhang

Abstract

This paper investigates calculations of robust XVA, in particular, credit valuation adjustment (CVA) and funding valuation adjustment (FVA) for over-the-counter derivatives under distributional uncertainty using Wasserstein distance as the ambiguity measure. Wrong way counterparty credit risk and funding risk can be characterized (and indeed quantified) via the robust XVA formulations. The simpler dual formulations are derived using recent infinite dimensional Lagrangian duality results. Next, some computational experiments are conducted to measure the additional XVA charges due to distributional uncertainty under a variety of portfolio and market configurations. Finally some suggestions for future work are discussed.

Suggested Citation

  • Derek Singh & Shuzhong Zhang, 2019. "Distributionally Robust XVA via Wasserstein Distance: Wrong Way Counterparty Credit and Funding Risk," Papers 1910.01781, arXiv.org, revised May 2020.
    • Handle: RePEc:arx:papers:1910.01781
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    References listed on IDEAS

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    1. Omar El Hajjaji & Alexander Subbotin, 2015. "Cva With Wrong Way Risk: Sensitivities, Volatility And Hedging," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 18(03), pages 1-31.
    2. Paul Glasserman & Linan Yang, 2015. "Bounding Wrong-Way Risk in Measuring Counterparty Risk," Working Papers 15-16, Office of Financial Research, US Department of the Treasury.
    3. Jose Blanchet & Karthyek Murthy, 2019. "Quantifying Distributional Model Risk via Optimal Transport," Mathematics of Operations Research, INFORMS, vol. 44(2), pages 565-600, May.
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    Cited by:

    1. T. van der Zwaard & L. A. Grzelak & C. W. Oosterlee, 2022. "Efficient Wrong-Way Risk Modelling for Funding Valuation Adjustments," Papers 2209.12222, arXiv.org, revised Jun 2024.
    2. Derek Singh & Shuzhong Zhang, 2019. "Distributionally Robust XVA via Wasserstein Distance Part 2: Wrong Way Funding Risk," Papers 1910.03993, arXiv.org.

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