Capital Allocation for Credit Portfolios with Kernel Estimators

Quantitative Finance 9(5), 581-595, 2009

21 Pages Posted: 27 Dec 2006 Last revised: 22 Jan 2014

See all articles by Dirk Tasche

Dirk Tasche

Swiss Financial Market Supervisory Authority (FINMA)

Date Written: November 17, 2007

Abstract

Determining contributions by sub-portfolios or single exposures to portfolio-wide economic capital for credit risk is an important risk measurement task. Often economic capital is measured as Value-at-Risk (VaR) of the portfolio loss distribution. For many of the credit portfolio risk models used in practice, the VaR contributions then have to be estimated from Monte Carlo samples. In the context of a partly continuous loss distribution (i.e. continuous except for a positive point mass on zero), we investigate how to combine kernel estimation methods with importance sampling to achieve more efficient (i.e. less volatile) estimation of VaR contributions.

Keywords: Capital allocation, kernel estimation, importance sampling

JEL Classification: C14, C15

Suggested Citation

Tasche, Dirk, Capital Allocation for Credit Portfolios with Kernel Estimators (November 17, 2007). Quantitative Finance 9(5), 581-595, 2009, Available at SSRN: https://ssrn.com/abstract=953735 or http://dx.doi.org/10.2139/ssrn.953735

Dirk Tasche (Contact Author)

Swiss Financial Market Supervisory Authority (FINMA) ( email )

Einsteinstrasse 2
Bern, 3003
Switzerland

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