UNIVAQ RANDOM TALKS - The Ph.D. COLLOQUIUM ________________________________
Online conferences on Probability and Applications at DISIM - UNIVERSITÁ DI L'AQUILA
Monday June 8th 2:30 p.m. - ZOOM Videoconference platform
Prof. Philip Protter
Statistics Department
Columbia University
Nonlinear Valuation in Credit Risk
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Abstract: In a series of recent papers, Damiano Brigo, Andrea Pallavicini, and co-authors have shown that the value of a contract in a Credit Valuation Adjustment (CVA) setting, being the sum of the cash flows, can be represented as a solution of a decoupled forward-backward stochastic differential equation (FBSDE). CVA is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counter party's default. In other words, CVA is the market value of counter party credit risk. This has achieved noteworthy importance after the 2008 financial debacle, where counter party risk played an under-modeled but huge risk. In their analysis, Brigo et al make the classical assumption of conditional independence of the default times, given the risk-free market filtration. This does not allow for the possibility of simultaneous defaults. We weaken their assumption, replacing it with a martingale orthogonality condition. This in turn changes the form of the BSDE that arises from the model. My talk is based on joint work with Aditi Dandapani.
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Fabio Antonelli DISIM - Università di L'Aquila