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A New Approach to Risk Attribution and Its Application in Credit Risk Analysis

Author

Listed:
  • Christoph Frei

    (Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, AB T6G 2G1, Canada)

Abstract

How can risk of a company be allocated to its divisions and attributed to risk factors? The Euler principle allows for an economically justified allocation of risk to different divisions. We introduce a method that generalizes the Euler principle to attribute risk to its driving factors when these factors affect losses in a nonlinear way. The method splits loss contributions over time and is straightforward to implement. We show in an example how this risk decomposition can be applied in the context of credit risk.

Suggested Citation

  • Christoph Frei, 2020. "A New Approach to Risk Attribution and Its Application in Credit Risk Analysis," Risks, MDPI, vol. 8(2), pages 1-13, June.
    • Handle: RePEc:gam:jrisks:v:8:y:2020:i:2:p:65-:d:371982
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    References listed on IDEAS

    as
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    Cited by:

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    2. Solveig Flaig & Gero Junike, 2023. "Profit and loss attribution: An empirical study," Papers 2309.07667, arXiv.org, revised Dec 2023.

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