Credit Name Concentration Risk: Granularity Adjustment Approximation
- 1 Ecole Nationale de la Statistique et de l’Administration Economique (ENSAE), Paris, France
Abstract
During the last subprime mortgage crisis, the concentration risk issue has become increasingly important in the world of finance. This risk is defined as the loss that we can incur from a large exposition of a single name counterparty, a sector or a product. This paper represents some mathematical models for assessment and quantification of the concentration risk under the Add-On approach. This study is based on the Granularity Adjustment ( GA ). This measure quantifies the idiosyncratic risk that is neglected by the Asymptotic Single Risk Factor model ( ASRF ) based on the infinitely granular assumption of the portfolio. This work is about the approximation of this measurement to simplify the formula of GA using the Ad-Hoc approach. We have implemented empirical tests to find the relation between the GA and concentration indexes and we applied these results to the iBoxx portfolio.
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