%0 Journal Article
%T Modeling and Quantifying of the Global Wrong Way Risk
%A Badreddine Slime
%J Journal of Financial Risk Management
%P 231-246
%@ 2167-9541
%D 2017
%I Scientific Research Publishing
%R 10.4236/jfrm.2017.63017
%X The counterparty risk issue
has become increasingly important in the world of finance. This risk is defined
as the loss due to the counterparty default. The regulator uses the Credit
Value Adjustment (<span style=\"font-family:Verdana;\"><i></i></span><i><i><span style=\"font-family:Verdana;\">CVA</span><span style=\"font-family:Verdana;\"></span></i></i><span style=\"font-family:Verdana;\">) to measure this risk. However, there is the independency assumption
between the default and the exposure behind the </span><span style=\"font-family:Verdana;\"><i></i></span><i><i><span style=\"font-family:Verdana;\">CVA</span><span style=\"font-family:Verdana;\"></span></i></i><span style=\"font-family:Verdana;\"> computation and it is not verified on the financial market. This paper
presents two mathematical models for the assessment and the quantification of
the counterparty risk without this assumption. This kind of risk is known as
Wrong Way Risk (</span><span style=\"font-family:Verdana;\"><i></i></span><i><i><span style=\"font-family:Verdana;\">WWR</span><span style=\"font-family:Verdana;\"></span></i></i><span style=\"font-family:Verdana;\">). This study focuses on t</span><span style=\"font-family:Verdana;\">h</span><span style=\"font-family:Verdana;\">ree approaches: empirical, copula and mixed model.
The first one is based on the hazard rate modelling to express the correlation
between the probability of default and the exposure. The second one is about
calculating the </span><span style=\"font-family:Verdana;\"><i></i></span><i><i><span style=\"font-family:Verdana;\">WWR</span><span style=\"font-family:Verdana;\"></span></i></i><span style=\"font-family:Verdana;\"> effect using copulas. The last one is a combination of both. There is
another assumption that makes easier the </span><span style=\"font-family:Verdana;\"><i></i></span><i><i><span style=\"font-family:Verdana;\">CVA</span><span style=\"font-family:Verdana;\"></span></i></i><span style=\"font-family:Verdana;\"> computation: The constant of the loss given default (</span><span style=\"font-family:Verdana;\"><i></i></span><i><i><span style=\"font-family:Verdana;\">LGD</span><span style=\"font-family:Verdana;\"></span></i></i><span style=\"font-family:Verdana;\">). As we know this assumption is not verified
because the </span><span style=\"font-family:Verdana;\"><i></i></span><i><i><span style=\"font-family:Verdana;\">LGD</span><span style=\"font-family:Verdana;\"></span></i></i><span style=\"font-family:Verdana;\"> could be deterministic or stochastic. Otherwise, it
could lead to a </span><span
%K Counterparty Risk
%K Credit Value Adjustment
%K Wrong Way Risk
%K Copulas
%U http://www.scirp.org/journal/PaperInformation.aspx?PaperID=78354