Shortfall: a tail of two parts

Richard Martin and Dirk Tasche show that the expected shortfall, when used in the conditional independence framework, has an elegant decomposition into systematic (risk-factor-driven) and unsystematic parts. The theory is compared and contrasted with the well-known, and analogous, decomposition for variance

One of the challenges in trading and risk management of portfolios and portfolio derivatives is understanding where the risk is coming from - a difficulty because there are many underlyings. The initial objective of credit portfolio modelling 10 or so years ago was simply to construct a distribution of loss or profit and loss, thereby only measuring risk at portfolio level. More recently, it has become much easier for market participants to hedge or securitise risk, and various financial

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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