Counterparty Risk

Counterparty and Central Counterparty Risk in the OTC Derivatives Market

Counterparty risk has been widely considered one of the key drivers of the 2007-2009 financial crisis. It has become one of main focuses of international regulatory bodies, particularly in the over-the-counter (OTC) derivatives market. The 2009 G-20 OTC derivatives reform program has focused on higher capital and margin requirements for OTC derivatives and the mandatory clearing of a large portion of them through central counterparties (CCPs). These counterparty risk-centric reforms are drastically changing the dynamics of financial markets.

Sound counterparty risk management is complex. It draws upon the theory of asset pricing under counterparty risk and modern portfolio theory. However, it has a high computational complexity, since a derivatives portfolio could consist of tens of thousands of OTC transactions. In modern counterparty risk, bank regulation (which is often formulaic) interacts with the principle-based CCP regulation. The research on derivatives CCPs, their optimal design, and their impact on financial stability is very much a work-in-progress.

The following Center for Risk Management Research papers authored by Samim Ghamami, Lisa Goldberg, and their collaborators address various aspects of modern counterparty risk.

Samim Ghamami and Paul Glasserman. 2017. Submodular Risk Allocation.

Samim Ghamami. 2015. Static Models of Counterparty Risk.

Peter Carr and Samim Ghamami. 2015. Derivatives Pricing Under Bilateral Counterparty Risk.

Samim Ghamami and Lisa Goldberg. 2014. Stochastic Intensity Models of Wrong Way Risk: Wrong Way CVA Need Not Exceed Independent CVA.

Samim Ghamami and Bo Zang. 2014. Efficient Monte Carlo CVA Estimation.

Samim Ghamami and Bo Zang. 2014. Efficient Monte Carlo Counterparty Credit Risk Pricing and Measurement.