A subordinated CIR model for CVA with wrong-way risk

Mbaye, Cheikh [UCL] Vrins, Frédéric [UCL]

Finding an adequate model for Credit Valuation Adjustment (CVA) remains a chal- lenging task; it needs to be both exible and tractable. More explicitly, the expected value of the survival process has to be known in closed form (for calibration purposes), the model should be able to t any valid CDS curve (to avoid arbitrage opportunities), should lead to large volatilities (in line with CDS options) and nally should be able to feature signicant Wrong-Way Risk (WWR) impact. In this paper, we consider the time-changed CIR intensity model introduced by Mendoza- Arriaga & Linetsky. This model allows for two-sides intensity jumps and seems to imply more WWR compared to jump diusion models. In order to avoid the correlation breakdown resulting from the time change, we work with a synchronized copy of the original exposure process.