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Asymmetric asset correlation in credit portfolios

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  • Cho, Yongbok
  • Lee, Yongwoong

Abstract

This study proposes a novel time-varying credit risk model to describe the cyclicality and asymmetry of asset correlation in credit portfolios. Our proposed model is developed based on a GJR-GARCH type volatility and copula-based conditional dependence. We prove that our model outperforms the regulatory model for the U.S. credit portfolios with strong empirical evidence of cyclical and asymmetric asset correlation. Furthermore, we argue that Basel’s criteria of asset correlation may be insufficient during economic downturns.

Suggested Citation

  • Cho, Yongbok & Lee, Yongwoong, 2022. "Asymmetric asset correlation in credit portfolios," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322002732
    DOI: 10.1016/j.frl.2022.103037
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    References listed on IDEAS

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    Cited by:

    1. Anton van Dyk & Gary van Vuuren, 2023. "Measurement and Calibration of Regulatory Credit Risk Asset Correlations," JRFM, MDPI, vol. 16(9), pages 1-19, September.

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    More about this item

    Keywords

    Asymmetric asset-correlation; Credit portfolio risk; Time-varying risk parameters; Cyclicality; ASRF model; Basel criteria;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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