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May 23

Coherent Global Market Simulations and Securitization Measures for Counterparty Credit Risk

Posted by abiao at 08:40 | Paper Review | Comments(1) | Reads(10692)
Counterparty risk has been increasingly popular largely due to the recent credit crisis (a crisis timeline was shared at an older post credit crisis timeline), however, most of valuing, hedging and securitizing counterparty credit risk involves Monte Carlo simulations, we have to be careful to make sure those simulated measures are arbitrage free. Below is a great paper talking about Mathematics and the software architecture of a risk system that includes counterparty risk and guarantees the measures are coherent.

The usage pattern is based on an offline phase to calibrate and generate model libraries. Valuation and simulation algorithms are planned offline with portfolio specific optimizations. The interactive user-driven phase includes a coherent global market simulation taking a few minutes and a real time data exploration phase with response time below 10 seconds.

Data exploration includes 3-dimensional risk visualization of portfolio loss distributions and sensitivities. It also includes risk resolution capability for outliers from the global portfolio level down to the single instrument level and hedge ratio optimization. The network bottleneck is bypassed by using heterogeneous boards with acceleration. The memory bottleneck is avoided at the algorithmic level by adapting the mathematical framework to revolve around a handful of compute-bound algorithms.

A working paper is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1844711.

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