Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/201810 
Authors: 
Year of Publication: 
2019
Publisher: 
ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg
Abstract: 
The incremental risk charge (IRC) is a new regulatory requirement from the Basel Committee in response to the recent financial crisis. Notably few models for IRC have been developed in the literature. This paper proposes a methodology consisting of two Monte Carlo simulations. The first Monte Carlo simulation simulates default, migration, and concentration in an integrated way. Combining with full re-valuation, the loss distribution at the first liquidity horizon for a subportfolio can be generated. The second Monte Carlo simulation is the random draws based on the constant level of risk assumption. It convolutes the copies of the single loss distribution to produce one year loss distribution. The aggregation of different subportfolios with different liquidity horizons is addressed. Moreover, the methodology for equity is also included, even though it is optional in IRC.
Subjects: 
Incremental risk charge (IRC)
constant level of risk,
liquidity horizon
constant loss distribution
Merton-type model
concentration
JEL: 
E44
G21
G24
G32
G33
G18
G28
Document Type: 
Working Paper

Files in This Item:
File
Size
329.41 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.