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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Bibliographic Details
Main Author:	Christoph Frei
Format:	Article
Language:	English
Published:	MDPI AG 2020-06-01
Series:	Risks
Subjects:	risk attribution risk allocation credit risk Euler principle risk factors
Online Access:	https://www.mdpi.com/2227-9091/8/2/65

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spelling	doaj-94498e92b0ac4a69a7be5b530abe89982020-11-25T03:50:50ZengMDPI AGRisks2227-90912020-06-018656510.3390/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
collection	DOAJ
language	English
format	Article
sources	DOAJ
author	Christoph Frei
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
author_facet	Christoph Frei
author_sort	Christoph Frei
title	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_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_sort	new approach to risk attribution and its application in credit risk analysis
publisher	MDPI AG
series	Risks
issn	2227-9091
publishDate	2020-06-01
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.
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
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A New Approach to Risk Attribution and Its Application in Credit Risk Analysis

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