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Review of Managerial Science

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01-01-2015 | Original Paper

Capital allocation in credit portfolios in a multi-period setting: a literature review and practical guidelines

Authors: Tamara Pfister, Sebastian Utz, Maximilian Wimmer

Published in: Review of Managerial Science | Issue 1/2015

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Abstract

This article reviews the literature on techniques of credit risk models, multi-period risk measurement, and capital allocation, and gives a tutorial on applying these techniques to credit portfolios with a focus on practical aspects. The effects of the choice of considered loss process concerning the handling of write-offs and matured assets or rating migration are displayed, and the impact on portfolio optimization decisions is discussed. We highlight the trade-off between short-term and long-term profitability and allude to the practical challenges of an application of multi-period risk measurement.

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On the other hand, considering loss would be sensible when analyzing the loss of a single period (potentially not the upcoming one) or when using risk measures that simply sum up over different periods.

Notice that VaR is not coherent. While some authors argue that it should not be classified as a risk measure at all, we consider VaR to be a non-coherent risk measure.

Notice that while it may look as if \(\hbox{ES}_\alpha(\tilde{L}^T)\) was discounted only for T − 1 periods, it is actually discounted for T periods, cf. Eq. (3).

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Title: Capital allocation in credit portfolios in a multi-period setting: a literature review and practical guidelines
Authors: Tamara Pfister
Sebastian Utz
Maximilian Wimmer
Publication date: 01-01-2015
Publisher: Springer Berlin Heidelberg
Published in: Review of Managerial Science / Issue 1/2015
Print ISSN: 1863-6683
Electronic ISSN: 1863-6691
DOI: https://doi.org/10.1007/s11846-014-0119-7

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