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An Analytical Framework for Credit Portfolio Risk Measures

by Mikhail Voropaev of ING Bank

May 2011

Abstract: Analytical, free of time consuming Monte Carlo simulations, framework for credit portfolio systematic risk metrics calculations is presented. Techniques are described that allow calculation of portfolio-level systematic risk measures (standard deviation, VaR and Expected Shortfall) as well as allocation of risk down to individual transactions. The underlying model is the industry standard multi-factor Merton-type model with arbitrary valuation function at horizon (in contrast to the simplistic default-only case). High accuracy of the proposed analytical technique is demonstrated by benchmarking against Monte Carlo simulations.

Keywords: analytical VaR, credit portfolio, capital allocation, multi-factor model.

Published in: RISK, Vol. 24, No. 5, (May 2011), pp. 72-78.

Previously titled: Analytical Framework for Credit Portfolios --and before that-- Analytical Framework for Credit Portfolios, Part I: Systematic Risk

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