Credit spread modeling effects on counterparty risk valuation adjustments: a spanish case study

We analyze the effects of the financial crisis in credit valuation adjustments (CVA's). Following the arbitrage-free valuation framework presented in Brigo et al. (2009), we consider a model with stochastic Gaussian interest rates and CIR++ default intensities. Departing from previous literature, we are able to calibrate default intensities profiting from Gaussian mapping techniques presented in Brigo and Alfonsi (2004), and reproduce the historically observed instantaneous covariances of CDS prices. To test the calibration procedure, we track the Spanish financial sector, who has behaved in a singular manner through the crisis, regarded among the safest in Europe at the beginning, and in need of a partial bailout a few years later. We calculate adjustments involving the two major Spanish banks and a generic European counterpart in these two situations for both interest rate and credit derivatives.