A New Approach to Risk Attribution and its Application in Credit Risk Analysis

Risks (2020) 8, 65 DOI:10.3390/risks8020065

13 Pages Posted: 10 Feb 2021

See all articles by Christoph Frei

Christoph Frei

University of Alberta - Department of Mathematical and Statistical Sciences

Date Written: June 11, 2020

Abstract

How can risk of a company be allocated to its divisions and attributed to risk factors? The Euler principle allows for an economically justified allocation of risk to different divisions. We introduce a method that generalizes the Euler principle to attribute risk to its driving factors when these factors affect losses in a nonlinear way. The method splits loss contributions over time and is straightforward to implement. We show in an example how this risk decomposition can be applied in the context of credit risk.

Keywords: risk attribution; risk allocation; credit risk; Euler principle; risk factors

JEL Classification: G32, C51

Suggested Citation

Frei, Christoph, A New Approach to Risk Attribution and its Application in Credit Risk Analysis (June 11, 2020). Risks (2020) 8, 65 DOI:10.3390/risks8020065, Available at SSRN: https://ssrn.com/abstract=3743970

Christoph Frei (Contact Author)

University of Alberta - Department of Mathematical and Statistical Sciences ( email )

Edmonton, Alberta T6G 2G1
Canada

HOME PAGE: http://www.math.ualberta.ca/~cfrei/

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