Gordy, Michael B., David Jones, "Random Tranches", RISK, Vol. 16, No. 3, (March 2003), pp. 78-83.
Abstract: How should economic or regulatory capital be allocated to tranches of securitisations? The standard Basel conditional dependence calculations are complicated in this case by non-linearity effects and complex deal dependence. Here, Michael Gordy and David Jones present an uncertainty in loss provision approach that simplifies these problems, and leads to a single economic capital formula suitable for regulatory purposes.
Keywords: Basel II, Credit portfolio risk, Quantitative analysis, Regulatory capital.