Counterparty Risk Valuation: A Marked Branching Diffusion Approach

Details Counterparty Risk Valuation: A Marked Branching Diffusion Approach Counterparty Risk Valuation: A Marked Branching Diffusion Approach

2012-03-11

arxiv.org/abs/1203.2369v1

Economy

Quantitative Finance

Computational Finance

Scientific paper

The purpose of this paper is to design an algorithm for the computation of the counterparty risk which is competitive in regards of a brute force "Monte-Carlo of Monte-Carlo" method (with nested simulations). This is achieved using marked branching diffusions describing a Galton-Watson random tree. Such an algorithm leads at the same time to a computation of the (bilateral) counterparty risk when we use the default-risky or counterparty-riskless option values as mark-to-market. Our method is illustrated by various numerical examples.

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