WBS Fixed Income Conference 2013 (Munich)

At WBS Fixed Income Conference which was held in Munich October 16-18, 2013, Alexander Sokol presented a pre-conference workshop as well as during the main conference program.

 

Pre-Conference Workshop: Constructing and Calibrating Long Dated Heavily Multifactor Models for CVA/PFE in Risk Neutral and Real World Measure

During the pre-conference workshop day, Alexander Sokol presented a hands-on workshop on constructing and calibrating long dated models for CVA/PFE. The workshop focused on the specifics of constructing and calibrating models for CVA/PFE which must simulate the evolution of a large number of risk factors for long time horizons and with incomplete calibration data. The workshop covered both risk neutral and real world measure models with specific focus on avoiding extreme or unrealistic values of parameters for longer time horizons, and calibration outside the time horizon for which calibration data is available.

Conference Presentation: Incorporating trade specific calibration into path consistent portfolio simulation under risk neutral and real world measures

A brief summary of the presentation during the regular conference program:

  • Monte Carlo simulation of portfolio exposure under risk neutral and real world measures must use the same paths for all trades within the netting set
  • Using traditional methodology, trade specific calibration is incompatible with path consistency under the risk neutral measure and is prohibitively slow under the real measure
  • The author presents several techniques for incorporating trade specific calibration into path consistent portfolio exposure simulation without the computational penalty
  • These techniques can help improve model accuracy measured by backtesting and the agreement between current exposure and accounting MtM

Related research

Combining Trade Specific Calibration with Path Consistency in Modeling CVA/FVA and Wrong Way Risk, Alexander Sokol, WBS Discounting, Funding, FVA & CVA Conference USA New York 2013

Modeling Credit Exposure to Systemically Important Counterparties, Michael Pykhtin and Alexander Sokol, RiskMinds Conference Amsterdam 2012 (summary)

A Practical Guide to Monte Carlo CVA, Alexander Sokol, in “Lessons from the Financial Crisis” (A. Berd, editor), Risk Books, 2010 (summary)