The Default Risk Charge approach to regulatory risk measurement processes

Bonollo Michele (), Persio Luca Di () and Prezioso Luca ()
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Bonollo Michele: Numerix LLC, IMT Lucca ,Lucca, Italy
Persio Luca Di: Dept. Computer Science - UniVr,Verona, Italy
Prezioso Luca: UniTn-UniVr-Paris Diderot,Trento, Italy

Dependence Modeling, 2018, vol. 6, issue 1, 309-330

Abstract: In the present paper we consider the Default Risk Charge (DRC) measure as an effective alternative to the Incremental Risk Charge (IRC) one, proposing its implementation by a quasi exhaustive-heuristic algorithm to determine the minimum capital requested to a bank facing the market risk associated to portfolios based on assets issued by several financial agents. While most of the banks use the Monte Carlo simulation approach and the empirical quantile to estimate this risk measure, we provide new computational approaches, exhaustive or heuristic, currently becoming feasible because of both the new regulation and to the high speed - low cost technology available nowadays. Concrete algorithms and numerical examples are provided to illustrate the effectiveness of the proposed techniques.

Keywords: Default Risk Charge; Incremental Risk Charge; Quasi Exhaustive-Heuristic Algorithms (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:demode:v:6:y:2018:i:1:p:309-330:n:18

DOI: 10.1515/demo-2018-0018

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