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Provisions and Economic Capital for Credit Losses

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  • Dorinel Bastide

    (LaMME)

  • St'ephane Cr'epey

    (LPSM)

Abstract

Based on supermodularity ordering properties, we show that convex risk measures of credit losses are nondecreasing w.r.t. credit-credit and, in a wrong-way risk setup, credit-market, covariances of elliptically distributed latent factors. These results support the use of such setups for computing credit provisions and economic capital or for conducting stress test exercises and risk management analysis.

Suggested Citation

  • Dorinel Bastide & St'ephane Cr'epey, 2024. "Provisions and Economic Capital for Credit Losses," Papers 2401.07728, arXiv.org, revised Dec 2024.
    • Handle: RePEc:arx:papers:2401.07728
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    File URL: http://arxiv.org/pdf/2401.07728
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    References listed on IDEAS

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    1. Dorinel Bastide & Stéphane Crépey & Samuel Drapeau & Mekonnen Tadese, 2023. "Derivatives’ Risks as Costs in a One-Period Network Model," World Scientific Book Chapters, in: Robert A Jarrow & Dilip B Madan (ed.), Peter Carr Gedenkschrift Research Advances in Mathematical Finance, chapter 8, pages 265-310, World Scientific Publishing Co. Pte. Ltd..
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    5. Claudio Albanese & Stéphane Crépey & Rodney Hoskinson & Bouazza Saadeddine, 2021. "XVA analysis from the balance sheet," Quantitative Finance, Taylor & Francis Journals, vol. 21(1), pages 99-123, January.
    6. Cousin, Areski & Laurent, Jean-Paul, 2008. "Comparison results for exchangeable credit risk portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 1118-1127, June.
    7. Shaked, Moshe & Shanthikumar, J. George, 1997. "Supermodular Stochastic Orders and Positive Dependence of Random Vectors," Journal of Multivariate Analysis, Elsevier, vol. 61(1), pages 86-101, April.
    8. Müller, Alfred & Scarsini, Marco, 2000. "Some Remarks on the Supermodular Order," Journal of Multivariate Analysis, Elsevier, vol. 73(1), pages 107-119, April.
    9. Areski Cousin & Jean-Paul Laurent, 2008. "Comparison results for exchangeable credit risk portfolios," Post-Print hal-03676451, HAL.
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    11. Block, Henry W. & Sampson, Allan R., 1988. "Conditionally ordered distributions," Journal of Multivariate Analysis, Elsevier, vol. 27(1), pages 91-104, October.
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