A New Approach to Risk Attribution and Its Application in Credit Risk Analysis
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 f...
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| Format: | Article |
| Language: | English |
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MDPI AG
2020-06-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/8/2/65 |
| _version_ | 1797565239955292160 |
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| author | Christoph Frei |
| author_facet | Christoph Frei |
| author_sort | Christoph Frei |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-03-10T19:09:19Z |
| format | Article |
| id | doaj.art-94498e92b0ac4a69a7be5b530abe8998 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-10T19:09:19Z |
| publishDate | 2020-06-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-94498e92b0ac4a69a7be5b530abe89982023-11-20T03:56:45ZengMDPI AGRisks2227-90912020-06-01826510.3390/risks8020065A New Approach to Risk Attribution and Its Application in Credit Risk AnalysisChristoph Frei0Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, AB T6G 2G1, CanadaHow 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.https://www.mdpi.com/2227-9091/8/2/65risk attributionrisk allocationcredit riskEuler principlerisk factors |
| spellingShingle | Christoph Frei A New Approach to Risk Attribution and Its Application in Credit Risk Analysis Risks risk attribution risk allocation credit risk Euler principle risk factors |
| title | A New Approach to Risk Attribution and Its Application in Credit Risk Analysis |
| title_full | A New Approach to Risk Attribution and Its Application in Credit Risk Analysis |
| title_fullStr | A New Approach to Risk Attribution and Its Application in Credit Risk Analysis |
| title_full_unstemmed | A New Approach to Risk Attribution and Its Application in Credit Risk Analysis |
| title_short | A New Approach to Risk Attribution and Its Application in Credit Risk Analysis |
| title_sort | new approach to risk attribution and its application in credit risk analysis |
| topic | risk attribution risk allocation credit risk Euler principle risk factors |
| url | https://www.mdpi.com/2227-9091/8/2/65 |
| work_keys_str_mv | AT christophfrei anewapproachtoriskattributionanditsapplicationincreditriskanalysis AT christophfrei newapproachtoriskattributionanditsapplicationincreditriskanalysis |