The Application Of Expected Shortfall To Credit Risk Management

Recent 20 years, the development of economic globalization and the fluctuation of financial market make it more and more important for the risk management. However, the traditional approaches are no longer satisfied the requirements of the credit risk management due to the emergence of financial innovation and credit derivatives. Therefore, the modification of the traditional method is one of the most challenging tasks in the field of risk management. In this paper, we study the credit risk with the main focus on the coherent measurement—Expected Shortfall.Firstly we introduce the background and significance of the study, in order to explain the prominent superiority of coherent measurement compared with other approaches, which has better mathematical characteristic and more reasonable economic meanings. Then we give a presentation of credit risk in brief. At last the recent researches of the credit risk model are introduced.In the second chapter, the traditional methods of the credit risk measurement are introduced briefly, and then the principle and main popular computing techniques of VaR are discussed. As well, the VaR models of widely used for credit risk measurement are introduced. At last, combining with the advantages of VaR, we point out its application of credit risk management in banks.The emphasis of this paper is the third and fourth chapter. In the third chapter, an improvement method named Expected Shortfall is introduced in the system of the coherent axiom, in order to make up the shortfall of VaR in credit risk measurement and optimization. Afterwards, we discuss the principle, computing technique and optimization model. In the fourth chapter, we do the credit risk measurement and portfolio optimization based on ES model, with the date of China bond market of Shanghai, including 401 trading days in all (from 2004.01.01 to 2005.08.30). The results of optimization indicate that this approach can diversify the portfolio risk effectively, eliminate the"tail risk"in some means, and decrease the probability of misled investors as well. At last, in the fifth chapter, we conclude the whole paper and put forward the way of development and the suggestions, for the research and application of this theory in China.