Haar Wavelets-Based Approach for Quantifying Credit Portfolio Losses

Details Haar Wavelets-Based Approach for Quantifying Credit Portfolio Losses Haar Wavelets-Based Approach for Quantifying Credit Portfolio Losses

2009-04-29

arxiv.org/abs/0904.4620v1

Economy

Quantitative Finance

Risk Management

Scientific paper

This paper proposes a new methodology to compute Value at Risk (VaR) for quantifying losses in credit portfolios. We approximate the cumulative distribution of the loss function by a finite combination of Haar wavelets basis functions and calculate the coefficients of the approximation by inverting its Laplace transform. In fact, we demonstrate that only a few coefficients of the approximation are needed, so VaR can be reached quickly. To test the methodology we consider the Vasicek one-factor portfolio credit loss model as our model framework. The Haar wavelets method is fast, accurate and robust to deal with small or concentrated portfolios, when the hypothesis of the Basel II formulas are violated.

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