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Determining marginal contributions of the economic capital of credit risk portfolio: an analytical approach

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  • Morone, Marco
  • Cornaglia, Anna
  • Mignola, Giulio
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    Abstract

    We address the problem of decomposing the risk of a multi-factor credit portfolio into marginal contributions through a fast analytical approach: it is based on Taylor polynomial expansion of the overall risk and on the subsequent partial derivatives with respect to the single exposures, exploiting the Euler principle. The proposed approximation, which also accommodates for an efficient treatment of obligors with similar risk profile, is suitable for large and complex bank portfolios; furthermore, it proves to perform quite well if tested against numerical techniques, among which we chose the Harrel-Davis estimator. The latter, aside from representing a benchmark measure, should however be applied in the case of very small and concentrated portfolios. In addition, a comparison with the most usual variance-covariance approach is drawn, emphasising its drawbacks in the correct representation of risk allocation.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39119.

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    Date of creation: Jun 2012
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    Handle: RePEc:pra:mprapa:39119

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    Related research

    Keywords: Credit VaR; Portfolio credit risk; Economic capital; Analytical VaR contributions; Euler allocation; Harrel-Davis estimator;

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    1. Christian Gourieroux & J. P. Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Econometric Society World Congress 2000 Contributed Papers 0162, Econometric Society.
    2. repec:fth:inseep:2000-05 is not listed on IDEAS
    3. Susanne Emmer & Dirk Tasche, 2003. "Calculating credit risk capital charges with the one-factor model," Papers cond-mat/0302402, arXiv.org, revised Jan 2005.
    4. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    5. Düllmann, Klaus & Puzanova, Natalia, 2011. "Systemic risk contributions: a credit portfolio approach," Discussion Paper Series 2: Banking and Financial Studies 2011,08, Deutsche Bundesbank, Research Centre.
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