Efficient estimation of unconditional capital by Monte Carlo simulation



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Ferrer, Alex and Casals Carro, José and Sotoca López, Sonia (2016) Efficient estimation of unconditional capital by Monte Carlo simulation. Finance Research Letters, 16 . pp. 75-84. ISSN 1544-6131

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Official URL: http://dx.doi.org/10.1016/j.frl.2015.10.010


We address the problem of determining the unconditional capital required by a credit portfolio using Monte Carlo simulation. By elaborating on a tractable analytical framework, we propose a new efficient simulation algorithm that overweights recession periods, which are the most important periods for determining the final capital figure, thereby improving its efficiency for a given number of simulations. We discuss the optimality and practical advantages of this algorithm. We also conduct an empirical analysis based on American charge-off data, which shows that the proposed algorithm achieves remarkable improvements in efficiency, without introducing any bias and at a negligible implementation cost.

Item Type:Article
Uncontrolled Keywords:Capital estimation; Charge-off; Credit risk; Monte Carlo simulation; Unconditional capital
Subjects:Sciences > Mathematics > Finance
Social sciences > Economics > Banks and credit unions
Social sciences > Economics > Econometrics
JEL:C58, G17, G21, G32
ID Code:55769
Deposited On:12 Jun 2019 12:40
Last Modified:23 Jun 2020 09:25

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