Credit Value at Risk

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Definition

Credit Value at Risk (CVaR) is a Risk Measure that aims to capture the downside value risk of a Credit Portfolio.

Formula

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 L=\sum L_{i}
  • A Confidence Level \alpha


Given a confidence level \alpha\in(0,1), the CVaR of calculated portfolio loss L at the confidence level \alpha is the smallest number K such that the probability that the lossL exceeds K is at least \alpha.

Usage

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

See also