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A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios
Year Of Publication: 2006
Month Of Publication: October
Pages: 35
Download Count: 11
View Count: 1720
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 2-21-2011
Publisher: Administrator
Summary
This paper explores a simplified version of the analytic value-at-risk approximation developed by Pykhtin (2004) which only requires risk parameters on a sector level. This approach is applied to measure the impact of credit concentrations in business sectors on the economic capital of credit portfolios. The sector composition of the portfolios is based on credit information from the German central credit register. Sensitivity analyses with various input parameters show that the analytic approximation formulae perform very well for fine-grained portfolios which are homogeneous on a sector level in terms of PD and exposure size. Furthermore, we explore the robustness of our results for portfolios which are heterogeneous in terms of these two characteristics. We find that low granularity ceteris paribus causes the analytic approximation formulae to underestimate economic capital, whereas heterogeneity in individual PDs causes overestimation. Indicative results imply that in typical credit portfolios of banks, PD heterogeneity will at least compensate for the granularity effect. This suggests that the analytic approximations estimate e
Author(s)
Duellmann, Klaus Sign in to follow this author
Masschelein, Nancy Sign in to follow this author
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