Capital allocation in credit portfolios in a multi-period setting: a literature review and practical guidelines

摘要

This article reviews the literature on techniques of credit risk models, multi-period risk measurement, and capital allocation, and gives a tutorial on applying these techniques to credit portfolios with a focus on practical aspects. The effects of the choice of considered loss process concerning the handling of writeoffs and matured assets or rating migration are displayed, and the impact on portfolio optimization decisions is discussed. We highlight the trade-off between short-term and long-term profitability and allude to the practical challenges of an application of multi-period risk measurement.