Measuring Economic Capital Using Loss Distributions
International Journal of Economics, Finance and Management Sciences
Volume 1, Issue 6, December 2013, Pages: 406-412
Received: Dec. 11, 2013; Published: Jan. 30, 2014
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Authors
Osei Antwi, Mathematics and Statistics Department, Accra Polytechnic, Accra-Ghana
Alice Constance Mensah, Mathematics and Statistics Department, Accra Polytechnic, Accra-Ghana
Martin Owusu Amoamah, Mathematics and Statistics Department, Accra Polytechnic, Accra-Ghana
Dadzie Joseph, Mathematics and Statistics Department, Accra Polytechnic, Accra-Ghana
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Abstract
This paper investigates the complexity involved in the quantitative measurement of Economic Capital and proposes simulation methods as a practical solution for obtaining the loss distribution of a portfolio of obligors. The paper examines a one factor model to generate loss distribution which establishes the necessary ingredients to measure the credit risk quantities in a loan portfolio. The general elements of credit risk modeling are outlined and then a specific model that employs a Monte Carlo simulation is developed. An example is provided that calculates the risk quantities in a loan portfolio from which the Economic Capital in a credit risk portfolio is obtained.
Keywords
Economic Capital, Unexpected Loss, Obligor, Asset Value Correlation, Joint Probability of Default
To cite this article
Osei Antwi, Alice Constance Mensah, Martin Owusu Amoamah, Dadzie Joseph, Measuring Economic Capital Using Loss Distributions, International Journal of Economics, Finance and Management Sciences. Vol. 1, No. 6, 2013, pp. 406-412. doi: 10.11648/j.ijefm.20130106.29
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