• Incremental Risk Charge Methodology

    Author(s):
    Tim Xiao (see profile)
    Date:
    2020
    Group(s):
    Business Management
    Subject(s):
    Economics
    Item Type:
    Article
    Tag(s):
    incremental risk charge, liquidity risk, risk management, capital charge, constant level of risk
    Permanent URL:
    http://dx.doi.org/10.17613/p1d4-5p11
    Abstract:
    The incremental risk charge (IRC) is a new regulatory requirement from the Basel Committee in response to the recent financial crisis. Notably few models for IRC have been developed in the literature. This paper proposes a methodology consisting of two Monte Carlo simulations. The first Monte Carlo simulation simulates default, migration, and concentration in an integrated way. Combining with full re-valuation, the loss distribution at the first liquidity horizon for a subportfolio can be generated. The second Monte Carlo simulation is the random draws based on the constant level of risk assumption. It convolutes the copies of the single loss distribution to produce one year loss distribution. The aggregation of different subportfolios with different liquidity horizons is addressed. Moreover, the methodology for equity is also included, even though it is optional in IRC.
    Metadata:
    xml
    Status:
    Published
    Last Updated:
    3 years ago
    License:
    All-Rights-Granted
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