Capital Allocation to Business Units and Sub-Portfolios: the Euler Principle
نویسنده
چکیده
In many financial institutions, there is a well established practice of measuring the risk of their portfolios in terms of economic capital (cf., e.g. Dev, 2004). Measuring portfolio-wide economic capital, however, is only the first step towards active, portfolio-oriented risk management. For purposes like identification of concentrations, risk-sensitive pricing or portfolio optimization it is also necessary to decompose portfoliowide economic capital into a sum of risk contributions by sub-portfolios or single exposures (see, e.g., Litterman, 1996).
منابع مشابه
Euler Allocation: Theory and Practice
Despite the fact that the Euler allocation principle has been adopted by many financial institutions for their internal capital allocation process, a comprehensive description of Euler allocation seems still to be missing. We try to fill this gap by presenting the theoretical background as well as practical aspects. In particular, we discuss how Euler risk contributions can be estimated for som...
متن کاملPrinter : Opaque this 1 Capital Allocation with CreditRisk +
Capital allocation for credit portfolios has two meanings. First, at portfolio level it means to determine capital as a buffer against an unexpected negative cash-flow resulting from credit losses. In this case, the allocation method can be specified by means of a risk measure. Its result is called economic capital of the portfolio. Second, at sub-portfolio or transaction level, capital allocat...
متن کامل3 Capital Allocation with CreditRisk +
Capital allocation for credit portfolios has two meanings. First, at portfolio level it means to determine capital as a buffer against an unexpected negative cash-flow resulting from credit losses. In this case, the allocation method can be specified by means of a risk measure. Its result is called economic capital of the portfolio. Second, at sub-portfolio or transaction level, capital allocat...
متن کاملMethods of Operational Risk Economic Capital Estimation and Allocation in Russian Commercial Banks
Modern systems of risk management in financial institutions require a process of estimation of the amount of capital that is needed to cover losses arising from various types of risk and its allocation to business units in order to measure their risk-adjusted performance. In this paper we describe the structure of operational risk economic capital estimation model suitable for implementation of...
متن کاملCoherent allocation of risk capital∗
The allocation problem stems from the diversification effect observed in risk measurements of financial portfolios: the sum of the “risks” of many portfolios is larger than the “risk” of the sum of the portfolios. The allocation problem is to apportion this diversification advantage to the portfolios in a fair manner, yielding, for each portfolio, a risk appraisal that accounts for diversificat...
متن کامل