Path-consistent wrong-way risk
In this paper, Klaus Böcker and Michael Brunnbauer define a general copula wrong-way risk (WWR) model and show how different copulas affect results such as potential future exposure and credit valuation adjustment figures. They present a very general model that respects the pathwise structure of future exposure and reconciles different existing models under the same framework
In the context of counterparty credit risk management and the computation of credit valuation adjustments (CVAs), the correct inclusion of wrong-way risk (WWR) is still a major concern for bank managers and regulators. According to the International Swaps and Derivatives Association, WWR can be defined as the risk that occurs when ‘the exposure to a counterparty is adversely correlated with the credit quality of that counterparty'. Here, we focus on general WWR, ie, the unspecific positive
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