In this paper I develop a framework to think through the interpretation an important piece of the new Basel guidelines for setting trading book capital. This piece – the Incremental Risk Charge (IRC) – is intended to cover default and migration risks in the trading book. Any bank that...

This issue of the Journal focuses on risk management for longer-term portfolios. The first article, by Eugene Stern, deals with a classic problem that individual investors face, but that is also important to institutional asset managers: how can one tell if a portfolio is poorly diversified?...

In the first paper, Christopher Finger presents empirical tests on variations of the standard model for tranched credit derivatives, or synthetic CDOs. There is a rich literature of new model proposals or extensions, but little empirical work focusing on the typical application of the model....

In counterparty credit risk management for swaps, forwards, and other derivative contracts, it is recognized that most common applications of credit exposure measurement suffer from the bias that counterparty default is independent of the amount of exposure. Stress tests are often proposed to...