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Calculating credit risk capital charges with the one-factor model

  • Susanne Emmer
  • Dirk Tasche

Even in the simple one-factor credit portfolio model that underlies the Basel II regulatory capital rules coming into force in 2007, the exact contributions to credit value-at-risk can only be calculated with Monte-Carlo simulation or with approximation algorithms that often involve numerical integration. As this may require a lot of computational time, there is a need for approximate analytical formulae. In this note, we develop formulae according to two different approaches: the granularity adjustment approach initiated by M. Gordy and T. Wilde, and a semi-asymptotic approach. The application of the formulae is illustrated with a numerical example. Keywords: One-factor model, capital charge, granularity adjustment, quantile derivative.

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File URL: http://arxiv.org/pdf/cond-mat/0302402
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Paper provided by arXiv.org in its series Papers with number cond-mat/0302402.

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Date of creation: Feb 2003
Date of revision: Jan 2005
Publication status: Published in Journal of Risk 7, 2005, pp. 85-101
Handle: RePEc:arx:papers:cond-mat/0302402
Contact details of provider: Web page: http://arxiv.org/

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  1. Christian Gourieroux & Jean-Paul Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Working Papers 2000-05, Centre de Recherche en Economie et Statistique.
  2. Christian Gourieroux & Jean-Paul Laurent & Olivier Scaillet, 2000. "Sensitivity Analysis of Values at Risk," Working Papers 2000-05, Centre de Recherche en Economie et Statistique.
  3. Carlo Acerbi & Dirk Tasche, 2001. "Expected Shortfall: a natural coherent alternative to Value at Risk," Papers cond-mat/0105191, arXiv.org.
  4. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.).
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