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Economic (Risk) Capital - How To - References

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Asymptotix published a White Paper (WP) on Credit Risk Economic Capital, Open Source R and High Performance Computing. REvolution Computing (now called Revolution Analytics) kindly supported this paper. The paper is extensively referenced and more and more right now I am being asked about the references, as a body of work in their own right, which indeed they are, my paper isn't really necessary (although I would argue that REvolution is!). My paper simply glues together in a narrative, that body of theoretic work which constitutes the leading thinking in the Economic Risk Capital space. You could view the references as a theoretical forge from which a set of R objects could be refined from that universe and then optimised in REvolution. At least that's way I see it. You can reference my paper here, at this url;



Below is a presentation of the set of references I used both the theoretical work (alot of it is very applied) on issues in Risk and Economic Capital and the specific applied papers on Stress Testing.




Credit Risk (Economic) Capital Modeling REFERENCES



a.        Capital allocation for securitizations with uncertainty in loss prioritization, Michael Gordy and David Jones, Federal Reserve Board, December 6, 2002, http://www.bis.org/publ/bcbs_wp11gj.pdf


ASYMPTOTIX NUMBER THREEb.       Pykhtin, and Dev, “Credit Risk in Asset Securitizations: Analytical Model" Risk, May 2002. Model Foundations for the Supervisory Formula Approach, Michael B. Gordy, Board of Governors of the Federal Reserve System, July 2004; http://www.moodyskmv.com/conf05/pdf/papers/m_gordy.pdf


c.        Bank of England, Working Paper No. 346, Network models and financial stability, Erlend Nier,, Jing Yang, Tanju Yorulmazer and Amadeo Alentorn; http://www.bankofengland.co.uk/publications/workingpapers/wp346.pdf


d.       Basel Committee on Banking Supervision, The Joint Forum Cross-Sectoral review of group-wide identification and management of risk concentrations, April 2008; http://www.bis.org/publ/joint19.pdf?noframes=1


e.        Basel Committee on Banking Supervision Consultative Document, Range of practices and issues in economic capital modelling, Issued for comment by 28 November 2008; http://www.bis.org/publ/bcbs143.pdf?noframes=1


f.         Stress testing of real credit portfolios, Ferdinand Mager (Queensland University of Technology and School of Economics and Finance), Christian Schmieder (Deutsche Bundesbank and European Investment Bank), Deutsche Bundesbank, Discussion Paper, Series 2: Banking and Financial Studies, No 17/2008; http://www.bundesbank.de/download/bankenaufsicht/dkp/200817dkp_b_.pdf


g.        Financial Services Authority, Review of the liquidity, requirements for banks and building societies DP07/7, http://www.fsa.gov.uk/pubs/discussion/dp07_07.pdf


h.       Economic Implications of Copulas and Extremes, Norges Bank, 2008, http://www.norges-bank.no/upload/71737/economic%20implications_pek_02_08.pdf


i.         Correlation: Pitfalls and Alternatives, Paul Embrechts, Alexander McNeil & Daniel Straumann, Departement Mathematik, ETH Zentrum, 1999; http://www.math.ethz.ch/~mcneil/ftp/risk.pdf


j.         Modeling Dependencies in Finance using Copulae; Wolfgang Härdle, Ostap Okhrin & Yarema Okhrin, SFB 649 Discussion Paper 2008-043; http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2008-043.pdf


k.       BIS Working Papers, No 165, Stress-testing financial systems: an overview of current methodologies, by Marco Sorge, BIS, Monetary and Economic Department, December 2004; http://www.bis.org/publ/work165.pdf?noframes=1


l.         Modelling Dependent Defaults: Asset Correlations Are Not Enough! Rudiger Frey, Swiss Banking Institute, University of Zurich. Alexander J. McNeil, Department of Mathematics, ETH Zurich, Mark A. Nyfeler, Investment Office RTC, UBS Zurich, March 9, 2001; http://www.mathematik.uni-leipzig.de/MI/frey/FreyMcNeilNyfeler.pdf


m.     BIS Working Papers, No 214; The pricing of portfolio credit risk by Nikola Tarashev and Haibin  Zhu, Monetary and Economic Department, September 2006; http://www.bis.org/publ/work214.pdf?noframes=1


n.       The pricing of correlated default risk: evidence from the credit derivatives market, Nikola Tarashev, (Bank for International Settlements) Haibin Zhu, (Bank for International Settlements) Discussion Paper, Series 2: Banking and Financial Studies, No 09/2008; http://www.bundesbank.de/download/bankenaufsicht/dkp/200809dkp_b_.pdf


o.       BIS Working Papers, No 173, Measuring default risk premia from default swap rates and EDFsby Antje Berndt, Rohan Douglas, Darrell Duffie, Mark Ferguson and David Schranz Monetary and Economic Department March 2005; http://www.bis.org/publ/work173.pdf?noframes=1


p.       McNeil AJ and Wendin JP: Bayesian inference for generalized linear mixed models of portfolio credit risk. Journal of Empirical Finance, 14(2): 131-149. 2007 Earlier preprint version may be found here: http://www.defaultrisk.com/pp_model_09.htm


q.       TIME-VARYING DEPENDENCE MODELLING OF MARKET AND CREDIT RISK, ROBERT SCHOFTNER; http://www.msfinance.ch/pdfs/RobertSchoeftner.pdf




Stress Testing (Specific Process) References



1.   Non-Linearities, Model Uncertainty, and Macro Stress Testing, by Miroslav Misina and David Tessier, Working Paper/Document de travail, 2008-30; Banque de Canada; http://dsp-psd.pwgsc.gc.ca/collection_2008/bank-banque-canada/FB3-2-108-30E.pdf


2.   Macro-model-based stress testing of Basel II capital requirements, Esa Jokivuolle, Kimmo Virolainen & Oskari Vähämaa, Bank of Finland Research, Discussion Papers, 17 2008; http://www.bof.fi/NR/rdonlyres/6F6D65CB-7334-4629-954C-B90F7AC279AC/0/0817netti.pdf


asymptotix number two3.   SIMULATING FINANCIAL INSTABILITY, Conference on stress testing and financial crisis simulation exercises, The European Central Bank, July 2008; http://www.ecb.eu/pub/pdf/other/simulatingfinancialinstability200809en.pdf


4.   Stress testing of real credit portfolios, Ferdinand Mager, Christian Schmieder, Discussion Paper, Series 2: Banking and  Financial Studies, No 17/2008; http://www.bundesbank.de/download/bankenaufsicht/dkp/200817dkp_b_.pdf


5.   Modelling The Distribution Of Credit Losses With Observable And Latent Factors, Gabriel Jiménez and Javier Mencía, 2007, Documentos de Trabajo, No. 0709, Banco de Espana; http://www.bde.es/informes/be/docs/dt0709e.pdf


6.   Stress Tests for the Austrian FSAP Update, 2007: Methodology, Scenarios and Results, Michael Boss, Gerhard Fenz, Gerald Krenn, Johannes Pann, Claus Puhr, Thomas Scheiber, Stefan W. Schmitz, Martin Schneider and Eva Ubl; http://www.oenb.at/en/img/fsr_15_special_topics_01_tcm16-87339.pdf


7.   The Next Generation of Default Prediction Models, Andreas Blochlingery, Zurcher Kantonalbank, Version: April 2007; http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1080231


8.   A FRAMEWORK FOR STRESS TESTING BANKS’ CREDIT RISK, Research Memorandum 15/2006, October 2006, Hong Kong Monetary Authority. http://www.info.gov.hk/hkma/eng/public/qb200612/E_25_38.pdf


9.   The Basel II framework: the role and implementation of Pillar 2, PIERRE-YVES HORAVAL General Secretariat of the Commission Bancaire, Banque de France Financial Stability Review No. 9 December 2006; http://www.banque-france.fr/gb/publications/telechar/rsf/2006/etud6_1206.pdf


10. DEVELOPING A FRAMEWORK FOR STRESS TESTING OF FINANCIAL STABILITY RISKS, NIGEL JENKINSON, Executive Director, Financial Stability, Bank of England, 2007. http://www.bankofengland.co.uk/publications/speeches/2007/speech318.pdf


11. Integrating credit and interest rate risk: A theoretical framework and an application to banks' balance sheets Mathias Drehmann, Steffen Sorensen & Marco Stringa; First Draft, April 2006; http://www.bis.org/bcbs/events/rtf06stringa_etc.pdf


12. Adjusting Multi-Factor Models for Basel II-consistent Economic Capital by Marc Gürtler, Martin Hibbeln, and Clemens Vöhringer, summer 2008. http://www.fmpm.ch/docs/11th/papers_2008_web/A2b.pdf


13. A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios, Klaus Düllmann and Nancy Masschelein, version: October 2006; http://www.bundesbank.de/download/bankenaufsicht/dkp/200609dkp_b.pdf


14. Stress testing as a tool for assessing systemic risks Bank of England Financial Stability Review: June 2005; http://www.bankofengland.co.uk/publications/fsr/2005/fsr18art8.pdf


15. Liquidity Stress-Tester: A macro model for stress-testing banks' liquidity risk, Jan Willem van den End, Netherlands Central Bank, Research Department in its series DNB Working Papers 175, May 2008, http://www.dnb.nl/binaries/Working%20paper%20175_tcm46-175526.pdf


16. Credit Risk Factor Modeling and the Basel II IRB Approach, Alfred Hamerle, Thilo Liebig, Daniel Rösch, Deutsche Bundesbank, Preliminary Draft from: October 7, 2002; http://www.bundesbank.de/download/bankenaufsicht/dkp/200302dkp_b.pdf


17. Stresstests in Banken, Von Basel II bis ICAAP, Kai-Oliver Klauck, Claus Stegmann, iFB, 2006




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