Andersson, Fredrik, Helmut Mausser, Dan Rosen, and Stanislav Uryasev, "Credit Risk Optimization with Conditional Value-at-Risk Criterion", Mathematical Programming, Vol. 89, No. 2, (January 2001), pp. 273-291.
Abstract: This paper examines a new approach for credit risk optimization. The model is based on the Conditional Value-at-Risk (CVaR) risk measure, the expected loss exceeding Value-at-Risk. CVaR is also known as Mean Excess, Mean Shortfall, or Tail VaR. This model can simultaneously adjust all positions in a portfolio of financial instruments in order to minimize CVaR subject to trading and return constraints. The credit risk distribution is generated by Monte Carlo simulations and the optimization problem is solved effectively by linear programming. The algorithm is very efficient; it can handle hundreds of instruments and thousands of scenarios in reasonable computer time. The approach is demonstrated with a portfolio of emerging market bonds.
AMS Classification: 20E28, 20G40, 20C20.
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