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Risk Contributions in an Asymptotic Multi-factor Framework
Company: Deutsche Bundesbank
Year Of Publication: 2005
Month Of Publication: May
Pages: 22
Download Count: 798
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 5-21-2005
Publisher: Administrator
So far, regulatory capital requirements for credit risk portfolios are calculated in a bottomupapproach by determining the requirements at asset level and then adding up them. Incontrast, economic capital for a credit risk portfolio is calculated for the portfolio as a wholeand then decomposed into risk contributions of assets or sub-portfolios for, e.g., diagnosticpurposes like identifying risk concentrations. In the “Asymptotic Single Risk Factor” modelthat underlies the most important part of the “Basel II Accord”, bottom-up and top-downapproach yield identical results. However, the model fails in detecting exposure concentrationsand recognizing diversification effects. We investigate multi-factor extensions of theASRF model and derive exact formulae for the risk contributions to Value-at-Risk and ExpectedShortfall. As an application of the risk contribution formulae we introduce a newconcept for a diversification index. The use of this new index is illustrated with an examplecalculated with a two-factor model. The results with this model indicate that there can bea substantial reduction of risk contributions by diversification effe
Tasche, Dirk Sign in to follow this author
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