@article {Xiao84, author = {Tim Xiao}, title = {An Accurate Solution for Credit Value Adjustment (CVA) and Wrong Way Risk}, volume = {25}, number = {1}, pages = {84--95}, year = {2015}, doi = {10.3905/jfi.2015.25.1.084}, publisher = {Institutional Investor Journals Umbrella}, abstract = {This article presents a new framework for credit value adjustment (CVA) that is a relatively new area of financial derivative modeling and trading. In contrast to previous studies, the model relies on the probability distribution of a default time rather than the default time itself, as the default time is usually inaccessible. As such, the model can achieve a high order of accuracy and is relatively easy to implement. The model captures wrong-way or right-way risk naturally. Using a unique dataset, the author finds empirical evidence that wrong- or right-way risk has a material effect on risky valuation and CVA. The magnitude of the impact is greater in credit and equity markets. The results also indicate that diversification is an effective way to mitigate wrong- or right-way risk.TOPICS: VAR and use of alternative risk measures of trading risk, counterparty risk}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/25/1/84}, eprint = {https://jfi.pm-research.com/content/25/1/84.full.pdf}, journal = {The Journal of Fixed Income} }