Measuring Default Risk for a Portfolio of Equities

This work evaluates changes proposed by the Basel Committee for capital allocation due to a company default in an equities portfolio of a bank. Recently measures like the Default Risk Charge were designed to account for the... [ view full abstract ]

This work evaluates changes proposed by the Basel Committee for capital allocation due to a company default in an equities portfolio of a bank. Recently measures like the Default Risk Charge were designed to account for the risk of default of a company that would not be caught by a 10-day Value at Risk. To design this measures we use a Merton Model to compute the Probability of Default. Which is compared with simulated asset returns to compute a 1-year VaR. The results shown are based in a portfolio of Ibovespa companies and a portfolio of S&P500 companies.