Counterparty Risk Valuation: A Marked Branching Diffusion Approach

Pierre Henry-Labordere
2012 Social Science Research Network  
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
more » ... t. Our method is illustrated by various numerical examples.
doi:10.2139/ssrn.1995503 fatcat:46xpzev5uzcadc7crtlakgdgi4