Capital Allocation and Per-Unit Risk in Inhomogeneousand Stressed Credit Portfolios

Dorfleitner, Gregor; Pfister, Tamara

doi:10.3905/jfi.2012.22.3.064

Cited by 4 publications

(3 citation statements)

References 18 publications

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“…In problem (22), x denotes the vector of asset allocation, and it is an output parameter of the model to be determined; N denotes the number of assets in a portfolio; α is the Value-at-Risk (VaR) and it is another output parameter to be determined; β is a input parameter and pre-determined by a decision-maker, indicating the level of confidence; f(x,y) is the loss function and it is a random variable having a distribution in R induced by the risky assets loss vector y, which has a joint density function of p(y); Ri (i=1,...,N) is the i-th asset's rate of return; [U] + =U, when U>0 otherwise [U] + =0. In this optimization problem, the constraints include the overall expected return is higher than a given amount, i.e.…”

Section: Comparison With Cvar Modelmentioning

confidence: 99%

“…R*, the constraint that there is no asset to be sold and the capital budget constraint. The analytical expression of problem ( 22) is difficult to derive for a general distribution of p(y) (Nemirovski and Shapiro 2006), and a Monte Carlo (MC) simulation method is normally adopted to obtain an effective approximation for problem (22)…”

Section: Comparison With Cvar Modelmentioning

confidence: 99%

“…b13-y13j=0 for any j=1,2,...,J, therefore a risk-free asset's credit loss is not included in the approximation of the portfolio credit loss. The remaining parameters in (23) are defined the same with those in (22). The level of confidence, i.e.…”

Section: Comparison With Cvar Modelmentioning

confidence: 99%

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A robust bank asset allocation model integrating credit-rating migration risk and capital adequacy ratio regulations

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In this paper, we consider a bank asset allocation problem with uncertain migration risk of credit ratings and capital adequacy ratio (CAR) regulations. In the practical scenarios, the future market values of each risky asset are largely affected by outer complex environments. We only observe the information about their first-moment and marginal second-moment of year-ahead market value of each loan asset. Based on these scenarios, we propose a new distributionally robust optimization model with the chance constraint characterized by uncertain capital adequacy ratio. Following the duality theory in infinite-dimensional optimization problem and the theory of conic linear optimization model, we can reformulate the original problem into a tractable linear deterministic semi-definite programming (SDP) model. By using this tractable linear SDP model, we can provide a robust asset allocation policy to bank managers. Further, we conduct a simulation study to illustrate the application of our method under two different economic conditions, a downward condition and an upward condition. Then a series of sensitivity tests is applied to examine the impacts of various factors, including safety probability, target CAR and recovery rate, on the optimal asset allocations. We also compare the performance of our model and the CVaR model. We demonstrate our model provides an efficient way to deal with the trade-off between expected return and CAR.

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Section: Comparison With Cvar Modelmentioning

confidence: 99%

Section: Comparison With Cvar Modelmentioning

confidence: 99%

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A robust bank asset allocation model integrating credit-rating migration risk and capital adequacy ratio regulations

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A Nonlinear Interval Portfolio Selection Model and Its Application in Banks

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Capital allocation in credit portfolios in a multi-period setting: a literature review and practical guidelines

2014

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This article reviews the literature on techniques of credit risk models, multiperiod risk measurement, and capital allocation, and gives a tutorial on applying these techniques to credit portfolios with a focus on practical aspects. The effects of the choice of considered loss process concerning the handling of write-offs and matured assets or rating migration are displayed, and the impact on portfolio optimization decisions is discussed. We highlight the trade-off between short-term and long-term profitability and allude to the practical challenges of an application of multi-period risk measurement. Keywords risk capital • credit risk • multi-period risk • Conditionally Independent Defaults • Copula models • capital allocation • risk contribution JEL Classification D81 • G21

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Capital Allocation and Per-Unit Risk in Inhomogeneousand Stressed Credit Portfolios

Cited by 4 publications

References 18 publications

A robust bank asset allocation model integrating credit-rating migration risk and capital adequacy ratio regulations

A robust bank asset allocation model integrating credit-rating migration risk and capital adequacy ratio regulations

A Nonlinear Interval Portfolio Selection Model and Its Application in Banks

Capital allocation in credit portfolios in a multi-period setting: a literature review and practical guidelines

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