Calculating credit risk capital charges with the one-factor model

Details Calculating credit risk capital charges with the one-factor model Calculating credit risk capital charges with the one-factor model

2003-02-20

arxiv.org/abs/cond-mat/0302402v5

Journal of Risk 7, 2005, pp. 85-101

Physics

Condensed Matter

Other Condensed Matter

15 pages, LaTeX with hyperref package, final version

Scientific paper

Even in the simple one-factor credit portfolio model that underlies the Basel II regulatory capital rules coming into force in 2007, the exact contributions to credit value-at-risk can only be calculated with Monte-Carlo simulation or with approximation algorithms that often involve numerical integration. As this may require a lot of computational time, there is a need for approximate analytical formulae. In this note, we develop formulae according to two different approaches: the granularity adjustment approach initiated by M. Gordy and T. Wilde, and a semi-asymptotic approach. The application of the formulae is illustrated with a numerical example. Keywords: One-factor model, capital charge, granularity adjustment, quantile derivative.

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