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Monte Carlo Simulation of Economic Capital Requirement and Default Protection Premium
Year Of Publication: 2006
Month Of Publication: September
Pages: 55
Download Count: 626
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Comment Num: 0
Language: EN
Source: working paper
Who Can Read: Free
Date: 9-29-2006
Publisher: Administrator
Summary
The paper presents a simulation framework for measuring and managing the default riskof a loan portfolio. Through the dependency of counterparty default on a systematic riskfactor, we explore the economic capital requirement for a hypothetical credit portfolio.The study employs bivariate standard normal distribution for mapping asset returncorrelations into default correlations. Monte Carlo simulations are employed toapproximate the loss distribution and estimate various risk measures. The analysisperformed shows that the Asymptotic Single Risk Factor (ASRF) model is a fast way forgenerating heavy tailed credit loss distributions. Furthermore, we report completeanalytic derivation of Basel II-IRB risk weight functions. The paper also comments onthe pricing of single-period Portfolio Default Swaps.
Author(s)
Kulkarni, Amit Sign in to follow this author
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