IDEAS home Printed from https://ideas.repec.org/a/vrs/demode/v6y2018i1p309-330n18.html
   My bibliography  Save this article

The Default Risk Charge approach to regulatory risk measurement processes

Author

Listed:
  • Bonollo Michele

    (Numerix LLC, IMT Lucca ,Lucca, Italy)

  • Persio Luca Di

    (Dept. Computer Science - UniVr,Verona, Italy)

  • Prezioso Luca

    (UniTn-UniVr-Paris Diderot,Trento, Italy)

Abstract

In the present paper we consider the Default Risk Charge (DRC) measure as an effective alternative to the Incremental Risk Charge (IRC) one, proposing its implementation by a quasi exhaustive-heuristic algorithm to determine the minimum capital requested to a bank facing the market risk associated to portfolios based on assets issued by several financial agents. While most of the banks use the Monte Carlo simulation approach and the empirical quantile to estimate this risk measure, we provide new computational approaches, exhaustive or heuristic, currently becoming feasible because of both the new regulation and to the high speed - low cost technology available nowadays. Concrete algorithms and numerical examples are provided to illustrate the effectiveness of the proposed techniques.

Suggested Citation

  • Bonollo Michele & Persio Luca Di & Prezioso Luca, 2018. "The Default Risk Charge approach to regulatory risk measurement processes," Dependence Modeling, De Gruyter, vol. 6(1), pages 309-330, December.
    • Handle: RePEc:vrs:demode:v:6:y:2018:i:1:p:309-330:n:18
    DOI: 10.1515/demo-2018-0018
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/demo-2018-0018
    Download Restriction: no
    File URL: https://libkey.io/10.1515/demo-2018-0018?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Michele Manna & Stefano Nobili, 2023. "Banks' holdings of and trading in government bonds," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 257-283, January.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Marco Moscadelli, 2004. "The modelling of operational risk: experience with the analysis of the data collected by the Basel Committee," Temi di discussione (Economic working papers) 517, Bank of Italy, Economic Research and International Relations Area.
    4. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    5. Michele Bonollo & Luca Di Persio & Luca Mammi & Immacolata Oliva, 2017. "Estimating the Counterparty Risk Exposure by using the Brownian Motion Local Time," Papers 1704.03244, arXiv.org.
    6. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    7. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    8. Jhao-Siang Siao & Ruey-Ching Hwang & Chih-Kang Chu, 2016. "Predicting recovery rates using logistic quantile regression with bounded outcomes," Quantitative Finance, Taylor & Francis Journals, vol. 16(5), pages 777-792, May.
    9. Laurent, Jean-Paul & Sestier, Michael & Thomas, Stéphane, 2016. "Trading book and credit risk: How fundamental is the Basel review?," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 211-223.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Maria Stefanova, 2012. "Recovery Risiko in der Kreditportfoliomodellierung," Springer Books, Springer, number 978-3-8349-4226-5, September.
    2. Puzanova, Natalia & Düllmann, Klaus, 2013. "Systemic risk contributions: A credit portfolio approach," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1243-1257.
    3. Joël Bessis, 2009. "Risk Management in Banking," Post-Print hal-00494876, HAL.
    4. Michele Bonollo & Irene Crimaldi & Andrea Flori & Fabio Pammolli & Massimo Riccaboni, 2014. "Systemic importance of financial institutions: regulations, research, open issues, proposals," Working Papers 2/2014, IMT School for Advanced Studies Lucca, revised Mar 2014.
    5. Ioannis Anagnostou & Tiziano Squartini & Drona Kandhai & Diego Garlaschelli, 2020. "Uncovering the mesoscale structure of the credit default swap market to improve portfolio risk modelling," Papers 2006.03014, arXiv.org, revised Apr 2021.
    6. Annalisa Di Clemente, 2020. "Modeling Portfolio Credit Risk Taking into Account the Default Correlations Using a Copula Approach: Implementation to an Italian Loan Portfolio," JRFM, MDPI, vol. 13(6), pages 1-24, June.
    7. Xin Huang & Hao Zhou & Haibin Zhu, 2012. "Systemic Risk Contributions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(1), pages 55-83, October.
    8. Arturo Cortés Aguilar, 2011. "Estimación del residual de un bono respaldado por hipotecas mediante un modelo de riesgo crédito: una comparación de resultados de la teoría de cópulas y el modelo IRB de Basilea II en datos del merca," Revista de Administración, Finanzas y Economía (Journal of Management, Finance and Economics), Tecnológico de Monterrey, Campus Ciudad de México, vol. 5(1), pages 50-64.
    9. Marco Rocco, 2011. "Extreme value theory for finance: a survey," Questioni di Economia e Finanza (Occasional Papers) 99, Bank of Italy, Economic Research and International Relations Area.
    10. Klomp, Jeroen, 2013. "Government interventions and default risk: Does one size fit all?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 641-653.
    11. Mendicino, Caterina & Nikolov, Kalin & Ramirez, Juan-Rubio & Suarez, Javier & Supera, Dominik, 2020. "Twin defaults and bank capital requirements," Working Paper Series 2414, European Central Bank.
    12. Timo Dimitriadis & iaochun Liu & Julie Schnaitmann, 2023. "Encompassing Tests for Value at Risk and Expected Shortfall Multistep Forecasts Based on Inference on the Boundary," Journal of Financial Econometrics, Oxford University Press, vol. 21(2), pages 412-444.
    13. Paul Kupiec, 2007. "Financial stability and Basel II," Annals of Finance, Springer, vol. 3(1), pages 107-130, January.
    14. Breuer, Thomas & Jandacka, Martin & Rheinberger, Klaus & Summer, Martin, 2010. "Does adding up of economic capital for market- and credit risk amount to conservative risk assessment?," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 703-712, April.
    15. Marc Gürtler & Dirk Heithecker, 2006. "Modellkonsistente Bestimmung des LGD im IRB-Ansatz von Basel II," Schmalenbach Journal of Business Research, Springer, vol. 58(5), pages 554-587, August.
    16. Koutsomanoli-Filippaki, Anastasia I. & Mamatzakis, Emmanuel C., 2011. "Efficiency under quantile regression: What is the relationship with risk in the EU banking industry?," Review of Financial Economics, Elsevier, vol. 20(2), pages 84-95, May.
    17. Zhang, Feipeng & Xu, Yixiong & Fan, Caiyun, 2023. "Nonparametric inference of expectile-based value-at-risk for financial time series with application to risk assessment," International Review of Financial Analysis, Elsevier, vol. 90(C).
    18. Yang, Lu & Cui, Xue & Yang, Lei & Hamori, Shigeyuki & Cai, Xiaojing, 2023. "Risk spillover from international financial markets and China's macro-economy: A MIDAS-CoVaR-QR model," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 55-69.
    19. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    20. Caballero, Diego & Lucas, André & Schwaab, Bernd & Zhang, Xin, 2020. "Risk endogeneity at the lender/investor-of-last-resort," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 283-297.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:demode:v:6:y:2018:i:1:p:309-330:n:18. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.