Revisiting Interest Rate Swap Valuation with Counterparty Risk, Wrong-Way Risk, and OIS Discounting
Bibliographic record
Abstract
This article extends extant valuation models of interest rate swaps with counterparty credit risk by accounting for wrong-way risk and overnight index swap (OIS) discounting. The proposed model extends the models of previous researchers by capturing wrong-way risk in the credit value adjustment (CVA) calculation by way of the correlation between the intensity of default of the counterparty and the market interest rate. Under the proposed no-arbitrage pricing model, cash flows are discounted using OIS rates (mostly used by market practitioners following the 2007–2009 credit crisis), a proxy for risk-free rates. The authors thus propose a unified framework that captures under one umbrella: CVA, wrong-way risk, and OIS discounting. The model parameters are estimated using real market data. Their findings indicate that it is important to account for both counterparty and wrong-way risk in interest rate swap valuation since the two phenomena have nonnegligible impacts on CVA value. Additionally, using OIS rates as risk-free discount rates, the model yields adjustment values higher than those obtained with traditional LIBOR discount rates. <b>TOPICS:</b>Interest-rate and currency swaps, credit risk management
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How this classification was reachedexpand
Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.004 | 0.001 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.000 |
| Scholarly communication | 0.000 | 0.001 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one teacher head, not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".