Wrong-way Risk in Credit Valuation Adjustment of Credit Default Swap with Copulas: Application of Shifted Square Root Jump Diffusion for Default Intensities

We compare several models for the CVA (credit valuation adjustment) of a CDS (credit default swap) under a copula approach with stochastic default intensities. Adopting the shifted square root jump diffusion for the default... [ view full abstract ]

We compare several models for the CVA (credit valuation adjustment) of a CDS (credit default swap) under a copula approach with stochastic default intensities. Adopting the shifted square root jump diffusion for the default intensity, we derive the distribution function of the cumulative intensity which is required for the copula approach. To derive the distribution function, we reduce the multilayered Riemann surface of the characteristic function to a single layer and apply the fractional fast Fourier transform to the characteristic function. The numerical comparison implies that the tail dependent copulas well capture the wrong-way risk for the CVA.