MODELING AND VALUATION OF CREDIT RISK CIME-EMS Summer School on Stochastic Methods in Finance

MODELING AND VALUATION OF CREDIT RISK CIME - EMS Summer School on Stochastic Methods in

XVA : About CVA , DVA , FVA and Other Market Adjustments

Since the crisis, different adjustments are needed to account for counterparty risk and funding costs in the risk management of OTC derivatives, notably credit valuation adjustment (CVA), debt valuation adjustment (DVA) and funding valuation adjustment (FVA). These adjustments, which are, to some extent, interdependent and must be computed jointly, count today among the main P&L centers of inve...

Credit risk modeling using time-changed Brownian motion

Motivated by the interplay between structural and reduced form credit models, we propose to model the firm value process as a time-changed Brownian motion that may include jumps and stochastic volatility effects, and to study the first passage problem for such processes. We are lead to consider modifying the standard first passage problem for stochastic processes to capitalize on this time chan...

Incorporating Operational Characteristics and Start-up Costs in Option-based Valuation of Power Generation Capacity

We describe a stochastic dynamic programming approach for “real option” based valuation of electricity generation capacity incorporating operational constraints and startup costs. Stochastic prices of electricity and fuel are represented by recombining multinomial trees. Generators are modeled as a strip of cross commodity call options with a delay and a cost imposed on each option exercise. We...

Risk Pricing over Alternative Investment Horizons

I explore methods that characterize model-based valuation of stochastically growing cash flows. Following previous research, I use stochastic discount factors as a convenient device to depict asset values. I extend that literature by focusing on the impact of compounding these discount factors over alternative investment horizons. In modeling cash flows, I also incorporate stochastic growth fac...