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

The IUP Journal of Financial Risk Management, Vol. 7, Nos. 1 & 2, pp. 7-23, March & June 2010

Posted: 25 May 2010

See all articles by Michele Bonollo

Michele Bonollo

Banco Popolare

Paola Mosconi

IntesaSanpaolo Group

Fabio Mercurio

Bloomberg and Iason Ltd.

Date Written: May 24, 2010

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 (VaR) of the portfolio loss distribution, in the analytical framework originally developed by Vasicek in 1991. VaR is expressed as a sum of terms - the first contribution represents the VaR 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.

Suggested Citation

Bonollo, Michele and Mosconi, Paola and Mercurio, Fabio, Basel II Second Pillar: An Analytical VaR with Contagion and Sectorial Risks (May 24, 2010). The IUP Journal of Financial Risk Management, Vol. 7, Nos. 1 & 2, pp. 7-23, March & June 2010, Available at SSRN: https://ssrn.com/abstract=1614635

Michele Bonollo (Contact Author)

Banco Popolare ( email )

Padua
Italy

Paola Mosconi

IntesaSanpaolo Group ( email )

Banca IMI SpA
Largo Mattioli 3
Milano, Mi 20121
Italy

Fabio Mercurio

Bloomberg and Iason Ltd. ( email )

Lexington Avenue, Midtown Manhattan
New York, NY
United States

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