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Interest Rate Modelling for Counterparty Credit Risk and Credit Valuation Adjustment

Johansson, Anton LU (2025) In Master's Thesis in Mathematical Sciences FMSM01 20251
Mathematical Statistics
Abstract
This thesis evaluates three interest rate models the HW1F, HW2F, and CIR++ from a risk management perspective. Through simulation, we examine their ability to generate realistic yield curves, as well as their impact on exposure metrics and CVA in different market environments.

The CIR++ model consistently produces the highest and most conservative PFE estimates while also maintaining calibration stability. The HW2F model provides similarly high and realistic exposure and CVA estimates but suffers from occasional calibration failures due to its increased complexity. The HW1F is robust and simple to calibrate but tends to produce low exposures and CVA estimates.

In the end, the CIR++ model offers a strong balance between conservatism,... (More)
This thesis evaluates three interest rate models the HW1F, HW2F, and CIR++ from a risk management perspective. Through simulation, we examine their ability to generate realistic yield curves, as well as their impact on exposure metrics and CVA in different market environments.

The CIR++ model consistently produces the highest and most conservative PFE estimates while also maintaining calibration stability. The HW2F model provides similarly high and realistic exposure and CVA estimates but suffers from occasional calibration failures due to its increased complexity. The HW1F is robust and simple to calibrate but tends to produce low exposures and CVA estimates.

In the end, the CIR++ model offers a strong balance between conservatism, robustness, and simplicity, making it the most suitable choice for risk management purposes. (Less)
Please use this url to cite or link to this publication:
author
Johansson, Anton LU
supervisor
organization
course
FMSM01 20251
year
type
H2 - Master's Degree (Two Years)
subject
keywords
CCR, CVA, Hull White, CIR++
publication/series
Master's Thesis in Mathematical Sciences
report number
LUTFMS-3531-2025
ISSN
1404-6342
other publication id
2025:E78
language
English
id
9205940
date added to LUP
2025-06-26 07:52:44
date last changed
2025-06-26 07:52:44
@misc{9205940,
  abstract     = {{This thesis evaluates three interest rate models the HW1F, HW2F, and CIR++ from a risk management perspective. Through simulation, we examine their ability to generate realistic yield curves, as well as their impact on exposure metrics and CVA in different market environments.

The CIR++ model consistently produces the highest and most conservative PFE estimates while also maintaining calibration stability. The HW2F model provides similarly high and realistic exposure and CVA estimates but suffers from occasional calibration failures due to its increased complexity. The HW1F is robust and simple to calibrate but tends to produce low exposures and CVA estimates. 

In the end, the CIR++ model offers a strong balance between conservatism, robustness, and simplicity, making it the most suitable choice for risk management purposes.}},
  author       = {{Johansson, Anton}},
  issn         = {{1404-6342}},
  language     = {{eng}},
  note         = {{Student Paper}},
  series       = {{Master's Thesis in Mathematical Sciences}},
  title        = {{Interest Rate Modelling for Counterparty Credit Risk and Credit Valuation Adjustment}},
  year         = {{2025}},
}