A New Approach to Risk Attribution and Its Application in Credit Risk Analysis

Christoph Frei
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Christoph Frei: Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, AB T6G 2G1, Canada

Risks, 2020, vol. 8, issue 2, 1-13

Abstract: How can risk of a company be allocated to its divisions and attributed to risk factors? The Euler principle allows for an economically justified allocation of risk to different divisions. We introduce a method that generalizes the Euler principle to attribute risk to its driving factors when these factors affect losses in a nonlinear way. The method splits loss contributions over time and is straightforward to implement. We show in an example how this risk decomposition can be applied in the context of credit risk.

Keywords: risk attribution; risk allocation; credit risk; Euler principle; risk factors (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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