Applying importance sampling for estimating coherent credit risk contributions

Sandro Merino and Mark Nyfeler

Quantitative Finance, 2004, vol. 4, issue 2, 199-207

Abstract: A Monte Carlo simulation method based on importance sampling is applied to the problem of determining individual risk contributions of the obligors in a credit portfolio. The effectiveness of the method is benchmarked against standard Monte Carlo techniques and the asymptotic optimality of the method is proved. The risk measure adopted is expected shortfall, a particualr coherent risk measure. The concept of a coherent risk spectrum is discussed on the basis of some numerical examples.

Date: 2004
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DOI: 10.1080/14697680400000024

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