Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257945 
Year of Publication: 
2019
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 7 [Issue:] 4 [Article No.:] 107 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 1-14
Publisher: 
MDPI, Basel
Abstract: 
The aggregation of individual risks into total risk using a weighting variable multiplied by two ratio variables representing incidence and intensity is an important task for risk professionals. For example, expected loss (EL) of a loan is the product of exposure at default (EAD), probability of default (PD), and loss given default (LGD) of the loan. Simple weighted (by EAD) means of PD and LGD are intuitive summaries however they do not satisfy a reconciliation property whereby their product with the total EAD equals the sum of the individual expected losses. This makes their interpretation problematic, especially when trying to ascertain whether changes in EAD, PD, or LGD are responsible for a change in EL. We propose means for PD and LGD that have the property of reconciling at the aggregate level. Properties of the new means are explored, including how changes in EL can be attributed to changes in EAD, PD, and LGD. Other applications such as insurance where the incidence ratio is utilization rate (UR) and the intensity ratio is an average benefit (AB) are discussed and the generalization to products of more than two ratio variables provided.
Subjects: 
attribution
Basel Accord
credit risk
IFRS 9
insurance risk
loss given default
mean
probability of default
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
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