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Credit Valuation Adjustment Compression by Genetic Optimization

LaMME, Univ Evry, CNRS, Université Paris-Saclay, CEDEX, 91037 Évry, France
Author to whom correspondence should be addressed.
Risks 2019, 7(4), 100;
Received: 4 August 2019 / Revised: 21 September 2019 / Accepted: 23 September 2019 / Published: 29 September 2019
(This article belongs to the Special Issue Advances in Credit Risk Modeling and Management)
Since the 2008–2009 financial crisis, banks have introduced a family of X-valuation adjustments (XVAs) to quantify the cost of counterparty risk and of its capital and funding implications. XVAs represent a switch of paradigm in derivative management, from hedging to balance sheet optimization. They reflect market inefficiencies that should be compressed as much as possible. In this work, we present a genetic algorithm applied to the compression of credit valuation adjustment (CVA), the expected cost of client defaults to a bank. The design of the algorithm is fine-tuned to the hybrid structure, both discrete and continuous parameter, of the corresponding high-dimensional and nonconvex optimization problem. To make intensive trade incremental XVA computations practical in real-time as required for XVA compression purposes, we propose an approach that circumvents portfolio revaluation at the cost of disk memory, storing the portfolio exposure of the night so that the exposure of the portfolio augmented by a new deal can be obtained at the cost of computing the exposure of the new deal only. This is illustrated by a CVA compression case study on real swap portfolios. View Full-Text
Keywords: counterparty risk; credit valuation adjustment (CVA); XVA (X-valuation adjustments) compression; genetic algorithm counterparty risk; credit valuation adjustment (CVA); XVA (X-valuation adjustments) compression; genetic algorithm
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MDPI and ACS Style

Chataigner, M.; Crépey, S. Credit Valuation Adjustment Compression by Genetic Optimization. Risks 2019, 7, 100.

AMA Style

Chataigner M, Crépey S. Credit Valuation Adjustment Compression by Genetic Optimization. Risks. 2019; 7(4):100.

Chicago/Turabian Style

Chataigner, Marc, and Stéphane Crépey. 2019. "Credit Valuation Adjustment Compression by Genetic Optimization" Risks 7, no. 4: 100.

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