Evaluating design choices in economic capital modeling
Subtitle: a loss function approach
By: by Nicholas M. Kiefer and C. Erik Larson.
Contributors: Larson, C. Erik.; United States. Office of the Comptroller of the Currency.
Series: Economic and policy analysis working paper ;; 2004-2; Economic and policy analysis working paper (2000 : Online) ;; 2004-2.
Publisher: Office of the Comptroller of the Currency
Published: 2004
Place of publication: Washington, DC
Language: eng
Format: Electronic resource
Subjects: Bank capital -- Econometric models.
Description: "This paper considers issues relating to the segmentation or grouping of credit exposures and the potential impact upon economic capital allocation and attribution. When discussing capital allocation, we refer to the assessment of total capital at the portfolio level, while our discussion of capital attribution focuses on getting capital assigned appropriately at the bucket level. We emphasize that a loss or value function must be specified so as to quantify the gains and losses from choosing a more or less granular asset segmentation scheme. Our chosen loss function considers the trade-off between the decrease in sampling variance obtained by combining data to increase sample size and the bias resulting from characterizing unlike assets with the same default probability. The implications are illustrated with several numerical examples that consider accuracy in the estimation of both portfolio-level and asset-level capital requirements. The suggested technique can be used to quantify whether a loss in accuracy from grouping or segmentation is outweighed by the decrease in variance of estimated capital. That is, the "loss" from grouping is small when the evaluation criterion is the accuracy of estimation of the required total capital; grouping is of more concern when we are interested in getting capital attributed correctly at the bucket level"--Office of the Comptroller of the Currency web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 12/15/2004.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.