Grundke Integrated Market and Credit Portfolio Models

Risk Measurement and Computational Aspects
1. Auflage 2008
ISBN: 978-3-8349-9689-3
Verlag: Betriebswirtschaftlicher Verlag Gabler
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, 188 Seiten, Web PDF

Reihe: Business and Economics

Due to their business activities, banks are exposed to many different risk types. Aggregating various risk exposures to a comprehensive risk position is an important but up-to-date not satisfactorily solved task. This shortfall goes back to conceptual problems of constructing an appropriate risk model and to the computational burden of determining a loss distribution that comprises all relevant risk types.

Peter Grundke deals with both problems. On the one hand, he extends a standard credit portfolio model by correlated interest rate and credit spread risk. The analysis shows that the economic capital needed as a buffer to absorb unexpected losses in a portfolio can be severely underestimated when relevant market risk factors are neglected. On the other hand, computational aspects are addressed. Particularly those problems are discussed which arise when computational tools developed for standard portfolio models are applied to integrated market and credit portfolio models.

Zielgruppe

Research

Autoren/Hrsg.

Grundke, Peter

Weitere Mitwirkende

Hartmann-Wendels, Univ.-Prof. Dr. Thomas

Inhaltsverzeichnis

The Integrated Market and Credit Portfolio Model.- Effects of Integrating Market Risk into Credit Portfolio Models.- On the Applicability of Fourier-Based Methods to Integrated Market and Credit Portfolio Models.- Importance Sampling for Integrated Market and Credit Portfolio Models.- Conclusions.

Leseproben

Chapter 5 Importance Sampling for Integrated Market and Credit Portfolio Models (p. 99-100)

5.1 Introduction

As already mentioned in chapter 4, beside Fourier-based approaches, another efficiency enhancing computational approach developed for standard credit portfolio models is based on Monte Carlo simulations combined with variance reduction techniques. Most common is the application of importance sampling (IS) techniques.

In this chapter, it is shown in detail how a two-step-IS technique presented by Glasserman and Li (2005) for a pure default mode model can be applied to the general integrated market and credit portfolio model of section 2.1, and what differences exist. Glasserman and Li (2005) employ IS for the probability distribution of the systematic risk factors as well as for the conditional default probabilities to make higher losses more probable under the IS distribution.

In contrast, almost all other papers which deal with IS for credit portfolio models only apply one-step-IS techniques.56 That is why the technique suggested by Glasserman and Li (2005) is expected to be especially effective and why it is employed in this chapter. Furthermore, it is discussed how an IS approach originally developed by Glasserman, Heidelberger and Shahabuddin (2000) for pure market risk portfolio models can be combined with the two-step-IS approach to build up a potentially even more effective three-step-IS technique.

Glasserman, Heidelberger and Shahabuddin (2000) use a delta-gamma approximation of the loss variable of a portfolio of default risk-free instruments for selecting an effective IS distribution for the normally distributed vector of market risk factors. As we deal with integrated market and credit portfolio models, the idea to combine methods originally developed for pure market risk portfolio models with those originally developed for pure (default mode) credit portfolio models might suggest itself. However, up to now this has not been tried.

Summarizing, the main questions answered in this chapter are:

1) Are IS techniques originally developed for pure default mode credit portfolio models also applicable to integrated market and credit portfolio models?
2) How effective are they for these extended models?
3) Is it possible to increase the effectiveness by combining IS techniques originally developed for pure default mode credit portfolio models with those originally developed for pure market risk portfolio models ?

Chapter 5 is structured as follows. In section 5.2, related literature is reviewed. In section 5.3, after a short introduction into the IS technique, two- and three-step-IS techniques when applied to the general integrated market and credit portfolio model are presented. The particularities resulting from the integrated market risk are discussed. The effectiveness of the presented IS techniques is tested by means of numerical experiments in section 5.4. Finally, the conclusions and main results are summarized in section 5.5.

Über Autor(innen)

PD Dr. Peter Grundke habilitierte am Seminar für Allgemeine Betriebswirtschaftslehre und Bankbetriebslehre der Universität zu Köln.
Er leitet zur Zeit das Fachgebiet Finance an der Universität Osnabrück.