Modelling Counterparty Credit Exposure under the risk-neutral measure

Title

Modelling Counterparty Credit Exposure under the risk-neutral measure

 Author

Bertoncini, Chiara (TU Delft Electrical Engineering, Mathematics and Computer Science)

Contributor

Cai, Juanjuan (mentor)
Cirillo, Pasquale (graduation committee)
Kolman, Marek (graduation committee)

Degree granting institution

Delft University of Technology

 Date

2018-10-22

 Abstract

Three interest rate models are researched: Displaced Exponential-Vasicek, Hull-White one factor and Hull-White two factors with time-dependent volatility parameters. The motivation for this is two-fold: firstly, we would like to understand how the capital calculations would be impacted when yield curves are modelled under the three different models. This is done by looking at both magnitude and stability of the risk profiles and scalar risk-measures for three counterparties, which are highly representative for the bank. Secondly, we investigate the benefits and drawbacks of using one model and its corresponding calibration method over the others, with a special attention to the impact on yields correlations.

The first model, calibrated to historical data, is used as a nine-factors model for forward rates and is currently being used within the bank for PFE profiles and CVA regulatory capital. Historical backtest has proven the current model to perform reasonably well on real data and therefore it is used as a benchmark against which the other two models are tested. The two Hull-White models, used as short rate models, are calibrated to the risk-neutral measure (namely, to European swap- tions). Precisely, a two-steps calibration procedure suited for piece-wise constant volatility functions is implemented for both. The stability analysis reveals that the variation of Exposure at Defaults is significant, which might be undesired. On the other side, the two short rate models retain the correlation structure of interest rates better than the current model. This in turn translates into higher capital impact.

 Subject

Displaced Exponential-Vasicek
Hull-White
multi-factors models
historical calibration
risk-neutral calibration
swaption
swaps portfolios
stability analysis
risk profiles
Exposure at Default

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http://resolver.tudelft.nl/uuid:86f950b0-6c7f-49fe-9638-c91c96ee3b6f

 Part of collection

Student theses

 Document type

master thesis

 Rights

© 2018 Chiara Bertoncini
Files
PDF CBertoncini_MasterThesis_public.pdf 7.63 MB
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