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Measuring Portfolio Loss Using Approximation Methods
Science Journal of Applied Mathematics and Statistics
Volume 2, Issue 2, April 2014, Pages: 42-52
Received: Mar. 7, 2014; Accepted: Apr. 9, 2014; Published: Apr. 20, 2014
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Author
Osei Antwi, Mathematics & Statistics Department, Accra Polytechnic, Accra, Ghana
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Abstract
One of the approaches to determining and quantifying the credit risk of a loan portfolio is by obtaining the distribution of losses of the portfolio and determining the risk quantities from such distributions. In this paper, we describe the challenges to using this approach and illustrate a practical solution where simulation methods are used to obtain loss distribution for a two obligor portfolio. This is then extended to ten and hundred obligor portfolios. Existing probability distributions with specified parameters are then used to approximate the loss distributions obtained. Using such parameters of the existing probability distributions, we obtain the risk quantities associated with the loan portfolio including Expected and Unexpected losses. We realized that depending on the confidence interval for which we measure the Unexpected Loss, Stress Losses are needed to account for the total loss of the portfolio
Keywords
Economic Capital, Expected Loss, Unexpected Loss, Obligor, Loss Given Default, Exposure at Default, Stress Loss
To cite this article
Osei Antwi, Measuring Portfolio Loss Using Approximation Methods, Science Journal of Applied Mathematics and Statistics. Vol. 2, No. 2, 2014, pp. 42-52. doi: 10.11648/j.sjams.20140202.11
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