Quantifying credit portfolio losses under multi-factor models

Gemma Colldeforns-Papiol, Luis Ortiz-Gracia, Cornelis W. Oosterlee

    Research output: Contribution to journalArticleResearch

    Abstract

    © 2018, © 2018 Informa UK Limited, trading as Taylor & Francis Group. In this work, we investigate the challenging problem of estimating credit risk measures of portfolios with exposure concentration under the multi-factor Gaussian and multi-factor t-copula models. It is well-known that Monte Carlo (MC) methods are highly demanding from the computational point of view in the aforementioned situations. We present efficient and robust numerical techniques based on the Haar wavelets theory for recovering the cumulative distribution function of the loss variable from its characteristic function. To the best of our knowledge, this is the first time that multi-factor t-copula models are considered outside the MC framework. The analysis of the approximation error and the results obtained in the numerical experiments section show a reliable and useful machinery for credit risk capital measurement purposes in line with Pillar II of the Basel Accords.
    Original languageEnglish
    Pages (from-to)2135-2156
    JournalInternational Journal of Computer Mathematics
    Volume96
    DOIs
    Publication statusPublished - 2 Nov 2019

    Keywords

    • 60E10
    • 62P05
    • 65T60
    • 91G60
    • Credit risk
    • expected shortfall
    • Fourier transform inversion
    • Gaussian copula
    • Haar wavelets
    • multi-factor models
    • t-copula
    • Value-at-Risk

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