Handling model risk with XVAs
Fuente:
arXiv
Gespeichert in:
| Hauptverfasser: | , |
|---|---|
| Format: | Preprint |
| Veröffentlicht: |
2022
|
| Schlagworte: | |
| Online-Zugang: | |
| Tags: |
Tag hinzufügen
Keine Tags, Fügen Sie den ersten Tag hinzu!
|
| _version_ | 1866910579645480960 |
|---|---|
| author | Bénézet, Cyril Crépey, Stéphane |
| author_facet | Bénézet, Cyril Crépey, Stéphane |
| contents | In this paper we revisit Burnett (2021) \& Burnett and Williams (2021)'s notion of hedging valuation adjustment (HVA), originally intended to deal with dynamic hedging frictions such as transaction costs, in the direction of model risk. The corresponding HVA reconciles a global fair valuation model with the local models used by the different desks of the bank. Model risk and dynamic hedging frictions indeed deserve a reserve, but a risk-adjusted one, so not only an HVA, but also a contribution to the KVA of the bank. The orders of magnitude of the effects involved suggest that local models should not so much be managed via reserves, as excluded altogether. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2205_11834 |
| institution | arXiv |
| publishDate | 2022 |
| record_format | arxiv |
| spellingShingle | Handling model risk with XVAs Bénézet, Cyril Crépey, Stéphane Pricing of Securities Probability Computational Finance In this paper we revisit Burnett (2021) \& Burnett and Williams (2021)'s notion of hedging valuation adjustment (HVA), originally intended to deal with dynamic hedging frictions such as transaction costs, in the direction of model risk. The corresponding HVA reconciles a global fair valuation model with the local models used by the different desks of the bank. Model risk and dynamic hedging frictions indeed deserve a reserve, but a risk-adjusted one, so not only an HVA, but also a contribution to the KVA of the bank. The orders of magnitude of the effects involved suggest that local models should not so much be managed via reserves, as excluded altogether. |
| title | Handling model risk with XVAs |
| topic | Pricing of Securities Probability Computational Finance |
| url | https://arxiv.org/abs/2205.11834 |