A Dynamic Model of Central Counterparty Risk
Host
Department of Applied Mathematics
Speaker
Shibi Feng
Department of Applied Mathematics, Illinois Institute of Technology
www.iit.edu/applied-math/about/phd-students
Description
We introduce a dynamic model of the default waterfall of derivatives CCPs and propose a risk-sensitive method for sizing the initial margin (IM), and the default fund (DF) and its allocation among clearing members. Using a Markovian structure model of joint credit migrations, our evaluation of DF takes into account the joint credit quality of clearing members as they evolve over time. Another important aspect of the proposed methodology is the use of the time consistent dynamic risk measures for computation of IM and DF. We carry out a comprehensive numerical study, where, in particular, we analyze the advantages of the proposed methodology and its comparison with the currently prevailing methods used in industry.
Event Topic
Mathematical Finance, Stochastic Analysis, and Machine Learning