Abstract
In Part 2, we have discussed the validation of models for credit risk by looking at the three components of the regulatory formula for risk-weighted assets: probability of default, loss given default and exposure at default. In this chapter we turn to a type of credit risk that has become extremely important in the wake of the 2008 financial crisis and the numerous and unexpected downgrades of counterparties (including the largest investment banks) which generated large migration losses in derivative trading books. Consequently, counterparty credit risk proved to be relevant not only for the trading activities of financial institutions, but also, in light of the many interconnections amongst them, for the stability of the financial system as a whole. Counterparty credit risk is relevant in the context of over-the-counter (OTC) derivatives and securities financing transactions (SFT)1. Risk in over-the-counter transactions and the combination of credit and market risk has been discussed in Duffie and Singleton (2003), the modelling of CCR is analysed in Pykhtin and Zhou (2006, 2007) and in Canabarro (2010), while Martin (2010) provides an overview of model risk in CCR systems.
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References
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© 2016 Sergio Scandizzo
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Scandizzo, S. (2016). Counterparty Credit Risk Models. In: The Validation of Risk Models. Applied Quantitative Finance series. Palgrave Macmillan, London. https://doi.org/10.1057/9781137436962_10
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DOI: https://doi.org/10.1057/9781137436962_10
Publisher Name: Palgrave Macmillan, London
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