Monte Carlo Simulation of Economic Capital Requirement & Default Protection Premium
نویسنده
چکیده
The paper presents a simulation framework for measuring and managing the default risk of a loan portfolio. Through the dependency of counterparty default on a systematic risk factor, we explore the economic capital requirement for a hypothetical credit portfolio. The study employs bivariate standard normal distribution for mapping asset return correlations into default correlations. Monte Carlo simulations are employed to approximate the loss distribution and estimate various risk measures. The analysis performed shows that the Asymptotic Single Risk Factor (ASRF) model is a fast way for generating heavy tailed credit loss distributions. Furthermore, we report complete analytic derivation of Basel II-IRB risk weight functions. The paper also comments on the pricing of single-period Portfolio Default Swaps.
منابع مشابه
Pricing Constant Maturity Credit Default Swaps Under Jump Dynamics
In this paper we discuss the pricing of Constant Maturity Credit Default Swaps (CMCDS) under single sided jump models. The CMCDS offers default protection in exchange for a floating premium which is periodically reset and indexed to the market spread on a CDS with constant maturity tenor written on the same reference name. By setting up a firm value model based on single sided Lévy models we ca...
متن کاملComparing Australian and US Corporate Default Risk Using Quantile Regression
The severe bank stresses of the Global Financial Crisis (GFC) have underlined the importance of understanding and measuring extreme credit risk. The Australian economy is widely considered to have fared much better than the US and most other major world economies. This paper applies quantile regression and Monte Carlo simulation to the Merton structural credit model to investigate the impact of...
متن کاملMonte Carlo Simulation of Radiation effects in protection layers of logical cell of the digital gate in the FPGA for electron and proton rays Using the FLUKA Code
In this paper, radiation effects in protection layers of logical cell of the digital gate in the FPGA for electron and proton rays was simulated Using the FLUKA Code. by using of the Monte Carlo simulation, the electron and proton transport into the logical cell of the digital gate in the FPGA will be studied. In this simulation, the maximum energy of the electrons and protons at the entrance o...
متن کاملAsset Correlation of German Corporate Obligors: Its Estimation, Its Drivers and Implications for Regulatory Capital (Paper presented at Basel Committee/Banca d'Italia workshop, 20-21 March 2003)
This paper addresses the gap between the theoretically well-understood impact of systematic risk on the loss-distribution of a credit-risky loan portfolio and the lack of empirical estimates of the default correlation. To this purpose we start with a one-factor model in which the correlation with the systematic risk factor equals the asset correlation between two firms. In the theoretical part ...
متن کاملDetermination of the adequate capital for default protection under the one-factor Gaussian term structure model
In practice, credit risk is measured by one of the two dierent methodologies. One measures the prices and sensitivities of the credit linked instruments. Another measures the required collateral or capital needed to cover a potential default loss. This paper introduces a pricing methodology, which also determines the required capital. Conventionally the value-at-risk method is used to determin...
متن کامل