Sensible and efficient capital allocation for credit portfolios
Michael Kalkbrener, Hans Lotter and Ludger Overbeck construct a new approach to economic capital allocation, showing that three axioms uniquely determine a capital allocation scheme, and, more importantly, that any allocation satisfying the axioms is associated with a coherent risk measure. Testing the theory on a sample portfolio, they find problems in value-at-risk-based capital allocation. Finally, using a homogeneous portfolio approximation, they develop an importance sampling algorithm to calculate expected shortfall for credit portfolios
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