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

Author

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

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.

Suggested Citation

  • Morone, Marco & Cornaglia, Anna & Mignola, Giulio, 2012. "Determining marginal contributions of the economic capital of credit risk portfolio: an analytical approach," MPRA Paper 39119, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39119
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    File URL: https://mpra.ub.uni-muenchen.de/39119/1/MPRA_paper_39119.pdf
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    References listed on IDEAS

    as
    1. Puzanova, Natalia & Düllmann, Klaus, 2013. "Systemic risk contributions: A credit portfolio approach," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1243-1257.
    2. Gourieroux, C. & Laurent, J. P. & Scaillet, O., 2000. "Sensitivity analysis of Values at Risk," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 225-245, November.
    3. 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.
    4. Susanne Emmer & Dirk Tasche, 2003. "Calculating credit risk capital charges with the one-factor model," Papers cond-mat/0302402, arXiv.org, revised Jan 2005.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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