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Simulation based approach for measuring concentration risk

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  • Kim, Joocheol
  • Lee, Duyeol
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    Abstract

    Asymptotic Single Risk Factor (ASRF) model is used to derive the regulatory capital formula of Internal Ratings-Based approach in the new Basel accord (Basel II). One of the important assumptions in ASRF model for credit risk is that the given portfolio is well diversified so that one can easily calculate the required capital level by focusing only on systematic risk. In real world, however, idiosyncratic risk of a portfolio cannot be fully diversified away, causing the so called concentration risk problem. In this paper we suggest simulation based approach for measuring concentration risk using bank capital dynamic model. This approach is especially suitable for a portfolio with relatively small to medium number of obligors and relatively large sized loans

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2968.

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    Date of creation: 01 Feb 2007
    Date of revision: 19 Apr 2007
    Handle: RePEc:pra:mprapa:2968

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    Keywords: Basel II; ASRF model; credit risk; concentration risk;

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    1. Peura, Samu & Jokivuolle, Esa, 2004. "Simulation based stress tests of banks' regulatory capital adequacy," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1801-1824, August.
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