Capital Allocation with CreditRisk+
Capital allocation for credit portfolios has two meanings. First, at portfolio level it means to determine capital as a buffer against an unexpected negative cash-flow resulting from credit losses. In this case, the allocation method can be specified by means of a risk measure. Its result is called economic capital of the portfolio. Second, at subportfolio or transaction level, capital allocation means breaking down the economic capital of the portfolio into its sub-units. The resulting capital assignments are called risk contributions. We discuss several current concepts for economic capital and risk contributions in a general setting. Then we derive formulas and algorithms for these concepts in the special case of the CreditRisk+ methodology with individual independent potential exposure distributions.
KeywordsCoherence Convolution Volatility
Unable to display preview. Download preview PDF.
- 5.F. Delbaen. Coherent Risk Measures. Lecture Notes, Scuola Normale Superiore di Pisa, 2001.Google Scholar
- 9.H. Haaf and D. Tasche. Credit portfolio measurements. GARP Risk Review, (7): 43–47, 2002.Google Scholar
- 10.M. Kalkbrener. An axiomatic approach to capital allocation. Technical document, Deutsche Bank AG, 2002.Google Scholar
- 12.G. Lemus. Portfolio optimization with quantile-based risk measures. PhD thesis, Sloan School of Management, MIT, 1999.Google Scholar
- 13.R. Litterman. Hot spotsTM and hedges. The Journal of Portfolio Management,22:52–75, 1996. •Google Scholar
- 14.R. Martin, K. Thompson, and C. Browne. VAR: Who contributes and how much? RISK, 14 (8): 99–102, 2001.Google Scholar