Showing papers by "Alexander J. McNeil published in 2001"
DOI•
01 Jan 2001
TL;DR: Results from a simulation study are presented showing that, even for fixed asset correlations, assumptions concerning the latent variable copula can have a profound effect on the distribution of credit losses.
Abstract: We consider the modelling of dependent defaults in large credit portfolios using latent variable models (the approach that underlies KMV and CreditMetrics) and mixture models (the approach underlying CreditRisk). We explore the role of copulas in the latent variable framework and show that for given default probabilities of individual obligors the distribution of the number of defaults in the portfolio is completely determined by the copula of the latent variables. We present results from a simulation study showing that, even for fixed asset correlations, assumptions concerning the latent variable copula can have a profound effect on the distribution of credit losses. In the mixture models defaults are conditionally independent given a set of common economic factors affecting all obligors and we explore the role of the mixing distribution of the factors in these models. In homogeneous, one-factor mixture models we find that the tail of the mixing distribution essentially determines the tail of the overall credit loss distribution. We discuss the relationship between latent variable models and mixture models and provide general conditions under which these models can be mapped into each other. Our contribution can be viewed as an analysis of the model risk associated with the modelling of dependence between individual default events. J.E.L. Subject Classification: G31, G11, C15
149 citations
TL;DR: In this paper, Statistical Modeling with Quantile Functions Journal of the American Statistical Association: Vol 96, No 456, pp 1525-1526, No. 456
Abstract: (2001) Statistical Modeling With Quantile Functions Journal of the American Statistical Association: Vol 96, No 456, pp 1525-1526
35 citations
TL;DR: It is shown that for a production unit of a bank with well-defined workflow processes where a comprehensive self-assessment based on six risk factors has been carried out, operational risk can be unambiguously defined and modelled.
Abstract: The Basel Committee on Banking Supervision ("the Committee") released a consultative document that included a regulatory capital charge for operational risk. The complexity of the object "operational risk" led from the time of the document's release to vigorous and recurring discussions. We show that for a production unit of a bank with well-defined workflow processes where a comprehensive self-assessment based on six risk factors has been carried out, operational risk can be unambiguously defined and modelled. Using techniques from extreme value theory, we calculate risk measures for independent and dependent risk factors, re-spectively. The results of this modelling exercise are relevant for the implementation of a risk management framework: Frequency dependence among the risk factors only slightly changes the independency results, severity dependence on the contrary changes the independency results significantly, the risk factor "fraud" dominates all other factors and finally, only 10 percent of all processes have a 98 percent contribution to the resulting VaR. Since the definition and maintenance of processes is very costly, this last results is of major practical relevance. Performing a sensitivity analysis, it turns out that the key 10% of relevant processes is rather robust under this stress testing.
34 citations
01 Jan 2001
TL;DR: In this article, the authors discuss the differences between financial risk markets, credit markets, and operational risk markets and discuss the common ideas that need to be considered when discussing these areas of financial risk management.
Abstract: reappear when one discusses the various areas of financial risk-market, credit, operational ? 2 How Should You Approach the Module ? * Search for the common ideas. What concepts and concerns reappear when one discusses the various areas of financial risk-market, credit, operational ? * Appreciate the differences. What special problems do the various areas of financial risk management create ? 2 How Should You Approach the Module ? * Search for the common ideas. What concepts and concerns reappear when one discusses the various areas of financial risk-market, credit, operational ? * Appreciate the differences. What special problems do the various areas of financial risk management create ? * Understand the role of regulation. Why is regulatory capital needed? What does the regulator require us to do? How will this change in the future ? What is likely impact of Basel II. 2 How Should You Approach the Module ? * Search for the common ideas. What concepts and concerns reappear when one discusses the various areas of financial risk-market, credit, operational ? * Appreciate the differences. What special problems do the various areas of financial risk management create ? * Understand the role of regulation. Why is regulatory capital needed? What does the regulator require us to do? How will this change in the future ? What is likely impact of Basel II. * Do all financial institutions face identical challenges? How does RM differ between a global player and a Swiss private bank?
1 citations