Incremental Risk Charge Methodology

Tim Xiao

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

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: E44 G18 G21 G24 G28 G32 G33 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mac, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/201810/1/IRC-Modeling-8.pdf (application/pdf)

Related works:
Working Paper: Incremental Risk Charge Methodology (2019)
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:201810

Access Statistics for this paper

More papers in EconStor Preprints from ZBW - Leibniz Information Centre for Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().