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Quantitative Finance > Pricing of Securities

arXiv:2205.11834 (q-fin)
[Submitted on 24 May 2022 (v1), last revised 28 Aug 2024 (this version, v3)]

Title:Handling model risk with XVAs

Authors:Cyril Bénézet (LaMME, ENSIIE), Stéphane Crépey (LPSM (UMR\_8001), UPCité)
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Abstract:In this paper we revisit Burnett (2021) \& Burnett and Williams (2021)'s notion of hedging valuation adjustment (HVA), originally intended to deal with dynamic hedging frictions such as transaction costs, in the direction of model risk. The corresponding HVA reconciles a global fair valuation model with the local models used by the different desks of the bank. Model risk and dynamic hedging frictions indeed deserve a reserve, but a risk-adjusted one, so not only an HVA, but also a contribution to the KVA of the bank. The orders of magnitude of the effects involved suggest that local models should not so much be managed via reserves, as excluded altogether.
Subjects: Pricing of Securities (q-fin.PR); Probability (math.PR); Computational Finance (q-fin.CP)
Cite as: arXiv:2205.11834 [q-fin.PR]
  (or arXiv:2205.11834v3 [q-fin.PR] for this version)
  https://doi.org/10.48550/arXiv.2205.11834

Submission history

From: Cyril Benezet [view email] [via CCSD proxy]
[v1] Tue, 24 May 2022 06:56:24 UTC (965 KB)
[v2] Thu, 21 Dec 2023 09:13:28 UTC (846 KB)
[v3] Wed, 28 Aug 2024 08:43:14 UTC (1,024 KB)
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