Wrong-way risk (WWR) arises when the value of a financial transaction is adversely correlated with the creditworthiness of the counterparty. This paper investigates WWR effects on the pricing of counterparty credit risk for interest rate instruments. These effects are captured via the correlations between the default of the counterparty and the two relevant market risk factors, namely the level and the volatility of the instantaneous spot interest rate. We consider an interest rate model featuring unspanned stochastic volatility behavior in order to analyze the effects of correlations on both volatility-insensitive instruments (interest rate swaps) and volatility-sensitive products (interest rate caps and floors). We also investigate the impact of correlation on the gap risk in collateralized instruments. Our empirical findings show that the wrong-way effect induced by the dependence between the interest rate volatility and the default intensity is generally small, even for volatility-sensitive derivatives. However, a dependence between the interest rate level and the default intensity has a sizable impact on counterparty risk.

中文翻译：

---

利率工具的错向风险

当金融交易的价值与交易对手的信誉度呈负相关时，就会出现错向风险 (WWR)。本文研究了 WWR 对利率工具交易对手信用风险定价的影响。这些影响是通过交易对手违约与两个相关市场风险因素（即即时即期利率的水平和波动性）之间的相关性来捕捉的。为了分析相关性对波动不敏感工具（利率掉期）和波动敏感产品（利率上限和下限）的影响，我们考虑了一个利率模型，该模型具有非跨度随机波动行为。我们还研究了相关性对抵押工具缺口风险的影响。我们的实证研究结果表明，由利率波动率和违约强度之间的依赖性引起的错误方向效应通常很小，即使对于波动率敏感的衍生品也是如此。然而，利率水平和违约强度之间的依赖性对交易对手风险有相当大的影响。