Title: Efficient frontier of credit risk using Monte Carlo simulation

Authors: João Luiz Chela; Luiz Leduíno De Salles Neto; Renan Brito Butkeraites

Addresses: Getulio Vargas Foundation (FGV), Rua Itapeva,432, São Paulo, São Paulo, Brazil ' Federal University of São Paulo, Av. Cesar Lattes, 1201, São José dos Campos, São Paulo, Brazil ' Federal University of São Paulo, Av. Cesar Lattes, 1201, São José dos Campos, São Paulo, Brazil

Abstract: This paper presents a new methodology for the construction of an efficient frontier for private securities in the Brazilian market, aiming to obtain the maximum return with minimum risk. For this purpose, the modelling risk was considered to be the risk of default of the securities coupled with a measure of credit risk that also considers emerging markets without liquidity in the secondary credit market. We used a multi-objective approach to the problem, considering the existence of both objectives, the maximum return with minimum risk. The generation of the loss distribution was performed via Monte Carlo simulation. Computational tests demonstrate the use of this innovative methodology is an example built for the Brazilian market.

Keywords: credit risk; efficient frontier; optimisation.

DOI: 10.1504/IJBISE.2019.098924

International Journal of Business Intelligence and Systems Engineering, 2019 Vol.1 No.3, pp.261 - 270

Received: 05 Dec 2017
Accepted: 28 Nov 2018
Published online: 09 Apr 2019 *

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