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ReferenceTitleLink
Gordy, M. (2003)A risk-factor foundation for risk-based capital rules

Abstract

"I demonstrate that ratings-based capital rules, including both the current Basel Accord and its proposed revision, can be reconciled with the general class of credit value-at-risk models. Each exposure's contribution to VaR is portfolio-invariant only if (a) dependence across exposures is driven by a single systematic risk factor, and (b) no exposure accounts for more than an arbitrarily small share of total portfolio exposure. Analysis of rates of convergence to asymptotic VaR leads to a simple and accurate portfolio-level add-on charge for undiversified idiosyncratic risk. There is no similarly simple way to address violation of the single factor assumption."


Additional Nematrian Commentary

An earlier version of this paper appears to be available from the Federal Reserve at http://www.federalreserve.gov/pubs/feds/2002/200255/200255pap.pdf.


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