Modelling Default Risk in the Trading Book: Accurate Allocation of Incremental Default Risk Charge Jan Kwiatkowski. Summary. Background on IDRC Trading book default risk models The need for accurate allocation Andersen, Sidenius & Basu (ASB) algorithm
Group Risk Management
Discretise LGD’s as multiples of a fixed ‘Loss Unit’
ui= loss units for issuer i
Let qi= PD for issuer i (conditional on givenX )
Recursively compute the distribution of the losses for portfolios consisting of the first i exposures only, for i =0, 1, 2, …., N
Exactly accounts for portfolio CES
We illustrate this for a long position (ui>0); this is easily adaptable to short positions.