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Stochastie Essentials for the Risk Management of Credit Portfolios

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Overbeck, L., Stahl, G. Stochastie Essentials for the Risk Management of Credit Portfolios. Credit and Capital Markets – Kredit und Kapital, 36(1), 52-81. https://doi.org/10.3790/ccm.36.1.52
Overbeck, Ludger and Stahl, Gerhard "Stochastie Essentials for the Risk Management of Credit Portfolios" Credit and Capital Markets – Kredit und Kapital 36.1, 2003, 52-81. https://doi.org/10.3790/ccm.36.1.52
Overbeck, Ludger/Stahl, Gerhard (2003): Stochastie Essentials for the Risk Management of Credit Portfolios, in: Credit and Capital Markets – Kredit und Kapital, vol. 36, iss. 1, 52-81, [online] https://doi.org/10.3790/ccm.36.1.52

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Stochastie Essentials for the Risk Management of Credit Portfolios

Overbeck, Ludger | Stahl, Gerhard

Credit and Capital Markets – Kredit und Kapital, Vol. 36 (2003), Iss. 1 : pp. 52–81

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Ludger Overbeck, Frankfurt/M.

Gerhard Stahl, Bonn

References

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Abstract

Recent developments in portfolio and risk management are driven by the need of quantitative risk assessment. Mertons asset value approach is presented in a portfolio context. Loss distributions are derived and different definitions of economic capital are considered. In particular the loss distribution underlying the current Basel II discussions is derived. A challenging task for risk management is the allocation of the risk capital to business units and single transactions. An analysis of two capital allocation methods is carried out. One based on expected shortfall contribution in credit portfolio modeling and the other based on contribution to the volatility which is the more traditional one. It turns out that the second one overestimates the risk of low rated counterparties with low concentration risk. The reason for this is that at the standard deviation many small losses are important, whereas at the quantile of the loss distribution large but rare losses are more important. This is captured by Expected Shortfall. Therefore Expected Shortfall contribution rewards diversification - name, industry and regional diversification. (JEL G31, G24, G00)