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Haar wavelets-based approach for quantifying credit portfolio losses
Masdemont Soler, Josep; Ortiz-Gracia, Luís
Centre de Recerca Matemàtica
This paper proposes a new methodology to compute Value at Risk (VaR) for quantifying losses in credit portfolios. We approximate the cumulative distribution of the loss function by a finite combination of Haar wavelet basis functions and calculate the coefficients of the approximation by inverting its Laplace transform. The Wavelet Approximation (WA) method is specially suitable for non-smooth distributions, often arising in small or concentrated portfolios, when the hypothesis of the Basel II formulas are violated. To test the methodology we consider the Vasicek one-factor portfolio credit loss model as our model framework. WA is an accurate, robust and fast method, allowing to estimate VaR much more quickly than with a Monte Carlo (MC) method at the same level of accuracy and reliability.
336 - Finances. Banca. Moneda. Borsa
Risc de crèdit
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Centre de Recerca Matemàtica
Prepublicacions del Centre de Recerca Matemàtica;1017

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