Determining the Marginal Contributions of the Economic Capital of Credit Risk Portfolio: An Analytical Approach

The IUP Journal of Financial Risk Management, Vol. X, No. 1, March 2013, pp. 7-25

Posted: 2 May 2013

See all articles by Marco Morone

Marco Morone

Intesa SanPaolo SpA

Anna Cornaglia

Independent

Giulio Mignola

Intesa SanPaolo Spa

Date Written: May 1, 2013

Abstract

The present paper addresses the problem of decomposing the risk of a multi-factor credit portfolio into marginal contributions through a fast analytical approach. It is based on Taylor polynomial expansion of the overall risk and on the subsequent partial derivatives with respect to the single exposures, exploiting the Euler principle. The proposed approximation, which also accommodates an efficient treatment ofobligors with similar risk profile, is suitable for large and complex bank portfolios. Furthermore, it performs quite well if tested against numerical techniques, among which the authors chose the Harrell-Davis estimator. The latter, aside from representing a benchmark measure, should however be applied only in the case of very small and concentrated portfolios. In addition, a comparison with the most usual variance-covariance approach is drawn, emphasizing its drawbacks in the correct representation of risk allocation.

Suggested Citation

Morone, Marco and Cornaglia, Anna and Mignola, Giulio, Determining the Marginal Contributions of the Economic Capital of Credit Risk Portfolio: An Analytical Approach (May 1, 2013). The IUP Journal of Financial Risk Management, Vol. X, No. 1, March 2013, pp. 7-25, Available at SSRN: https://ssrn.com/abstract=2258997

Marco Morone (Contact Author)

Intesa SanPaolo SpA ( email )

Via Monte di Pietà
Tourin, To 10122
Italy

Anna Cornaglia

Independent ( email )

Giulio Mignola

Intesa SanPaolo Spa ( email )

Piazza P. Ferrari 10
P.O. BOX 8319
Milan, 20121
Italy

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