Computation of VaR and VaR Contribution in the Vasicek Portfolio Credit Loss Model: A Comparative Study

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Computation of VaR and VaR Contribution in the Vasicek Portfolio Credit Loss Model: A Comparative Study

by Xinzheng Huang of TU Delft and Rabobank,
Cornelis W. Oosterlee of TU Delft and CWI, and
Mace A. Mesters of Rabobank

March 2007

Abstract: We compare various numerical methods for the estimation of the VaR and the marginal VaR Contribution (VaRC) in the Vasicek one-factor portfolio credit loss model. The methods we investigate are the normal approximation, the saddlepoint approximation, a simplified saddlepoint approximation and importance sampling. We investigate each method in terms of speed, accuracy and robustness and in particular explore their abilities of dealing with exposure concentration.

Keywords: portfolio credit risk, Value at Risk, VaR contribution, normal approximation, saddlepoint approximation, importance sampling.

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