Basel II Second Pillar: An Analytical VAR with Contagion and Sectorial Risks

17 Pages Posted: 1 Feb 2009

See all articles by Michele Bonollo

Michele Bonollo

affiliation not provided to SSRN

Fabio Mercurio

Bloomberg L.P.

Paola Mosconi

IntesaSanpaolo Group

Date Written: January 29, 2009

Abstract

This paper deals with the effects of concentration (single name and sectoral) and contagion risk on credit portfolios. Results are obtained for the value at risk of the portfolio loss distribution, in the analytical framework originally developed by Vasicek in 1991 [1]. VAR is expressed as a sum of terms: the first contribution represents the value at risk of a hypothetical single-factor homogeneous portfolio, the remaining terms are corrections due to contagion, imperfect granularity and multiple industry-geographic sectors. A detailed numerical analysis is also presented.

Keywords: Basel II, second pillar, credit VaR, analytical formula, contagion, sectorial risk

JEL Classification: C63, G11, G38

Suggested Citation

Bonollo, Michele and Mercurio, Fabio and Mosconi, Paola, Basel II Second Pillar: An Analytical VAR with Contagion and Sectorial Risks (January 29, 2009). Available at SSRN: https://ssrn.com/abstract=1334953 or http://dx.doi.org/10.2139/ssrn.1334953

Michele Bonollo

affiliation not provided to SSRN ( email )

Fabio Mercurio (Contact Author)

Bloomberg L.P. ( email )

731 Lexington Avenue
New York, NY 10022
United States

Paola Mosconi

IntesaSanpaolo Group ( email )

Banca IMI SpA
Largo Mattioli 3
Milano, Mi 20121
Italy

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