The Theoretical Methods And Empirical Research Of Credit Valuation Adjustments

One of the most important means of risk management is derivatives, which it also leads to risk. Because of the risk of derivatives exchange exposure, The regulatory authorities can’t measure the risk accurately. It’s not reasonable controlled. Eventually it becomes one of the most important factors that triggering the financial crisis. To reduce the risk between traders and counterparties, Basel Ⅲ covers the risk exposed in the derivatives exchange. One of the important measures is charging capital for the risk arising from credit valuation adjustments. However, there is insufficient charging on its way. First, the charging capital covers the risk of changes arising from credit spreads caused by counterparties, without considering the risks associated with market variables. Second, the charging capital doesn’t provide the calculation method of credit valuation adjustment, and also doesn’t incorporate the wrong-way risk and the guarantee. Thirdly, it focus on one-way charging of credit valuation adjustments, while ignoring the two-way risk, it doesn’t coincide with reality.This paper studies counterparty credit risk theory firstly. Then studies the method of credit valuation adjustments in Basel Ⅲ、the method of credit valuation adjustments with credit default and collateral included and the method of mix copula function with wrong-way risk considered respectively. Finally, based on the credit valuation adjustments(CVA), the paper compares between debt valuation adjustments(DVA) and financing valuation adjustments(FVA). It puts the three into a unified system and derived the general formula of valuation adjustments of derivative products.In this paper, we are considering the mixed Copula function with wrong-way risk to study the measurement methods based on Basel Ⅲ. It analyzes the characteristics of the nature of Copula and compares the Kendall’s rank correlation coefficient, Spearman’s rank correlation coefficient, Gini coefficient and tail dependence relations department. It introduces mixed Copula function in the model. It also discusses Spearman’s ρ rank correlation coefficient and copula function of bounds on credit valuation adjustments with wrong-way risk. In the empirical analysis, It makes FR007 as the reference interest rate in swaps and analyzes a number of factors that affect credit valuation adjustments with wrong way risk. It shows the credit valuation adjustment with wrong-way risk is far greater than the credit valuation adjustment without wrong-way risk. The conclusion is great significant for the scientific measure of commercial bank credit risk capital.