Counterparty Risk Valuation: A Marked Branching Diffusion Approach

Pierre Henry-Labordere (1)

1 SOCIETE GENERALE - Equity Derivatives Research Societe Generale

The purpose of this paper is to design an algorithm for the computation of the counterparty risk which is competitive in regards of a brute force ''Monte-Carlo of Monte-Carlo" method (with nested simulations). This is achieved using marked branching diffusions describing a Galton-Watson random tree. Such an algorithm leads at the same time to a computation of the (bilateral) counterparty risk when we use the default-risky or counterparty-riskless option values as mark-to-market. Our method is illustrated by various numerical examples.

Mots clés: Counterparty risk valuation; BSDE; branching diffusions; semi-linear PDE; Galton-Watson tree

Domaines: Finance quantitative [q-fin.CP]

Pierre Henry-Labordere. Counterparty Risk Valuation: A Marked Branching Diffusion Approach. 2012. ⟨hal-00677348⟩