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arXiv · 2207.03883

An introduction to rating triggers for collateral-inclusive XVA in an ICTMC framework

Kevin Kamm
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Abstract

In this paper, we model the rating process of an entity as a piecewise homogeneous continuous time Markov chain. We focus specifically on calibrating the model to both historical data (rating transition matrices) and market data (CDS quotes), relying on a simple change of measure to switch from the historical probability to the risk-neutral one. We overcome some of the imperfections of the data by proposing a novel calibration procedure, which leads to an improvement of the entire scheme. We apply our model to compute bilateral credit and debit valuation adjustments of a netting set under a CSA with thresholds depending on ratings of the two parties.

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Kevin Kamm. 2022-07-08. An introduction to rating triggers for collateral-inclusive XVA in an ICTMC framework. https://arxiv.org/abs/2207.03883

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