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Linking the problems of estimating and allocating unconditional capital

Listed author(s):
  • Alejandro Ferrer Pérez

    ()

    (Facultad de Ciencias Económicas. Universidad Complutense de Madrid.)

  • José Casals Carro

    (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.)

  • Sonia Sotoca López

    ()

    (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.)

Registered author(s):

    This paper addresses two problems related to determining the unconditional capital required by a credit portfolio: Estimating it using Monte Carlo simulation and allocating it among the different risk units that form the portfolio. By elaborating on a tractable analytical framework, we propose a new simulation algorithm and a new allocation method. Both contributions rely on the conditional loss distributions and share the same core idea. We discuss their optimality, consistence and practical advantages. In an empirical study based on American data, we show the remarkable gains in efficiency achieved by the former and the improvement in the standard variance-covariance allocation provided by the latter.

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    File URL: http://eprints.ucm.es/25741/1/1413.pdf
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    Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2014-13.

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    Length: 12 pages
    Date of creation: Jun 2014
    Handle: RePEc:ucm:doicae:1413
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    15. Alejandro Ferrer Pérez & José Casals Carro & Sonia Sotoca López, 2014. "A new approach to the unconditional measurement of default risk," Documentos de Trabajo del ICAE 2014-11, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
    16. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
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