Abstract
We develop a methodology for computing and allocating risk capital for
credit portfolios. We use Bayes’ theorem to express the distribution of loss
from exposure to individual assets, given a range of portfolio losses, in
terms of the distribution of portfolio loss conditional on the individual
assets having defaulted. We consider portfolios of corporate and tranched
asset-backed securities subject to losses from default and rating down
grades. We use the recursive algorithm of Andersen
et al (2003) for discretized losses from credit exposures that are independent conditional on the values of a set of risk factors
Original language | English |
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Pages (from-to) | 21-46 |
Journal | Journal of Credit Risk |
Volume | 4 |
Issue number | 1 |
Publication status | Published - 2008 |