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Justification of Per-Unit Risk Capital Allocation in Portfolio Credit Risk Models
Company: University of Regensburg Working Papers in Business
Year Of Publication: 2012
Month Of Publication: June
Pages: 36
Download Count: 4
View Count: 1633
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 8-19-2012
Publisher: Administrator
Risk capital allocation is based on the assumption that the risk of a homogeneous portfolio is scaled up and down with the portfolio size. In this article we show that this assumption is true for large portfolios, but has to be revised for small ones. On basis of numerical examples we calculate the minimum portfolio size that is necessary to limit the error of gradient risk capital allocation and the resulting error in a portfolio optimization algorithm or pricing strategy. We show the dependence of this minimum portfolio size on di erent parameters like the probability of default and on the credit risk model that is used.
(number #467)
Dorfleitner, Gregor Sign in to follow this author
Pfister, Tamara Sign in to follow this author
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