Handling model risk with XVAs - Archive ouverte HAL
Pré-Publication, Document De Travail Année : 2024

Handling model risk with XVAs

Résumé

In this paper we revisit Burnett (2021) & Burnett and Williams (2021)'s notion of hedging valuation adjustment (HVA), originally intended to deal with dynamic hedging frictions such as transaction costs, in the direction of model risk. The corresponding HVA reconciles a global fair valuation model with the local models used by the different desks of the bank. Model risk and dynamic hedging frictions indeed deserve a reserve, but a risk-adjusted one, so not only an HVA, but also a contribution to the KVA of the bank. The orders of magnitude of the effects involved suggest that local models should not so much be managed via reserves, as excluded altogether.
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Dates et versions

hal-03675291 , version 1 (23-05-2022)
hal-03675291 , version 2 (20-12-2023)
hal-03675291 , version 3 (26-08-2024)

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Cyril Bénézet, Stéphane Crépey. Handling model risk with XVAs. 2024. ⟨hal-03675291v3⟩
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