Incremental Risk Charge Methodology

Tim Xiao

Working Papers from HAL

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. Acknowledge: The work was sponsored by FinPricing at www.finpricing.com

Keywords: Incremental risk charge (IRC); constant level of risk; liquidity horizon; constant loss distribution; Merton-type model; concentration (search for similar items in EconPapers)
Date: 2019-02-18
New Economics Papers: this item is included in nep-cmp and nep-rmg
Note: View the original document on HAL open archive server: https://hal.science/hal-02024148v1
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Incremental Risk Charge Methodology (2019)
Working Paper: Incremental Risk Charge Methodology (2018)
Working Paper: Incremental Risk Charge Methodology (2018)
Working Paper: Incremental Risk Charge Methodology (2018)
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