Economics, Econometrics and Finance
8 years ago

New method accurately values credit derivatives, reducing financial risk for portfolios.

SSRN Electronic Journal
Wrong Way Risk Done Right
Shinghoi Lee, Luca Capriotti

Paper Summary

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The article presents a new way to value credit derivatives portfolios by considering how defaults of different companies are related. This method can accurately account for changes in credit risk and how companies' financial health affects each other. By using this approach, it is possible to manage large portfolios of credit derivatives more effectively under realistic financial conditions.