Credit risk in general equilibrium
AbstractCredit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery rate. In reality these parameters are the result of the interaction of many market participants: They are endogenous. We develop a general equilibrium model with endogenous credit risk that can be viewed as an extension of the capital asset pricing model. We analyze equilibrium prices of securities as well as equilibrium allocations in the presence of credit risk. We use the model to discuss the conceptual underpinnings of the approach to risk weight calibration for credit risk taken by the Basel Committee. JEL Classification: G32, G33, G01, D52
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Date of creation: Jun 2012
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Other versions of this item:
- Jürgen Eichberger & Klaus Rheinberger & Martin Summer, 2014. "Credit Risk in General Equilibrium," CESifo Working Paper Series 4602, CESifo Group Munich.
- Rheinberger, Klaus & Summer, Martin & Eichberger, Jürgen, 2011. "Credit Risk in General Equilibrium," Working Papers 172, Oesterreichische Nationalbank (Austrian Central Bank).
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-11 (All new papers)
- NEP-BAN-2012-11-11 (Banking)
- NEP-RMG-2012-11-11 (Risk Management)
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