Linking the problems of estimating and allocating unconditional capital

Alejandro Ferrer Pérez (), José Casals Carro and Sonia Sotoca López ()
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Alejandro Ferrer Pérez: Facultad de Ciencias Económicas. Universidad Complutense de Madrid.
José Casals Carro: Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.
Sonia Sotoca López: Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.

No 2014-13, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This paper addresses two problems related to determining the unconditional capital required by a credit portfolio: Estimating it using Monte Carlo simulation and allocating it among the different risk units that form the portfolio. By elaborating on a tractable analytical framework, we propose a new simulation algorithm and a new allocation method. Both contributions rely on the conditional loss distributions and share the same core idea. We discuss their optimality, consistence and practical advantages. In an empirical study based on American data, we show the remarkable gains in efficiency achieved by the former and the improvement in the standard variance-covariance allocation provided by the latter.

Keywords: Default risk; Capital estimation; Capital allocation; Unconditional measurement; Conditional measurement. (search for similar items in EconPapers)
JEL-codes: C58 G17 G21 G32 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2014-06
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