Credit Value at Risk
CVaR is a quantile Risk Measure and requires the specification of
- An aggregate Portfolio Loss (or Profit and Loss) variable constructed as the sum of potential individual losses
- A Confidence Level
Given a confidence level , the CVaR of calculated portfolio loss at the confidence level is the smallest number such that the probability that the loss exceeds is at least .
Credit Value at Risk is used in conjunction with a Credit Portfolio Model, a computational approach for the generation of future scenarios including different risk realizations.
Issues and Challenges
- CVaR has been developed largely as a mirror of the Value at Risk measure for portfolios of marketable securities, yet the more illiquid nature of credit portfolios forces substantial further assumptions and associated Model Risk
- CVaR inherits the weaknesses of VaR frameworks