Incremental Risk Charge Methodology

Tim Xiao

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Incremental risk charge (IRC); constant level of risk; liquidity horizon; constant loss distribution; Merton-type model; concentration. (search for similar items in EconPapers)
JEL-codes: C51 C58 G12 G15 G17 (search for similar items in EconPapers)
Date: 2019-05-08, Revised 2019-05-08
New Economics Papers: this item is included in nep-cmp, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
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https://mpra.ub.uni-muenchen.de/94581/1/MPRA_paper_94581.pdf original version (application/pdf)

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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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:94581

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