Department of Information Engineering, Computer Science, and Mathematics


Ph.D. in MATHEMATICS AND MODELS


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UNIVAQ RANDOM TALKS
The Ph.D. COLLOQUIUM


Monday June 8th 2:30 p.m. - ZOOM Videoconference platform

Prof. Philip Protter
Statistics Department, Columbia University

Nonlinear Valuation in Credit Risk


Abstract: In a series of recent papers, Damiano Brigo, Andrea Pallavicini, and co-authors have shown that the value of a contract in a Credit Valuation Adjustment (CVA) setting, being the sum of the cash flows, can be represented as a solution of a decoupled forward-backward stochastic differential equation (FBSDE).
CVA is the difference between the risk-free portfolio value and the true portfolio value that takes into account the possibility of a counter party's default. In other words, CVA is the market value of counter party credit risk. This has achieved noteworthy importance after the 2008 financial debacle, where counter party risk played an under-modeled but huge risk.
In their analysis, Brigo et al make the classical assumption of conditional independence of the default times, given the risk-free market filtration. This does not allow for the possibility of simultaneous defaults. We weaken their assumption, replacing it with a martingale orthogonality condition. This in turn changes the form of the BSDE that arises from the model.
My talk is based on joint work with Aditi Dandapani.


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