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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1445.
Date of creation: Jun 2012
Date of revision:
Contact details of provider:
Postal: Postfach 16 03 19, Frankfurt am Main, Germany
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/home/html/index.en.html
More information through EDIRC
Postal: Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany
Other versions of this item:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G01 - Financial Economics - - General - - - Financial Crises
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shin, Hyun Song, 2010. "Risk and Liquidity," OUP Catalogue, Oxford University Press, number 9780199546367.
- Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001.
"Default and Punishment in General Equilibrium,"
Cowles Foundation Discussion Papers
1304, Cowles Foundation for Research in Economics, Yale University.
- Pradeep Dubey & John Geanakoplos & Martin Shubik, 2001. "Default and Punishment in General Equilibrium," Cowles Foundation Discussion Papers 1304R5, Cowles Foundation for Research in Economics, Yale University, revised Mar 2004.
- P. Dubey & J. Geanakoplos & M . Shubik, 2001. "Default and Punishment in General Equilibrium," Department of Economics Working Papers 01-07, Stony Brook University, Department of Economics.
- Philipp J. Schönbucher, 2000. "Factor Models for Portofolio Credit Risk," Bonn Econ Discussion Papers bgse16_2001, University of Bonn, Germany.
- Helmut Elsinger & Martin Summer, 2001. "Arbitrage and Optimal Portfolio Choice with Financial Constraints," Working Papers 49, Oesterreichische Nationalbank (Austrian Central Bank).
- William R. Zame, 1990.
"Efficiency and the Role of Default When Security Markets are Incomplete,"
UCLA Economics Working Papers
585, UCLA Department of Economics.
- Zame, William R, 1993. "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review, American Economic Association, vol. 83(5), pages 1142-64, December.
- William R. Zame, 1992. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 673, UCLA Department of Economics.
- Hellwig, Martin, 2010.
"Capital Regulation after the Crisis: Business as Usual?,"
- Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 8(2), pages 40-46, 07.
- Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2010_31, Max Planck Institute for Research on Collective Goods.
- Sato Norihisa, 2010. "Existence of Competitive Equilibrium in Unbounded Exchange Economies with Satiation: A Note," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-22, July.
- Nielsen, Lars Tyge, 1989. "Asset Market Equilibrium with Short-Selling," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 467-73, July.
- Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-67, November.
- Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
- Peter Bossaerts & Charles Plott & William R. Zame, 2003.
"Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments,"
Swiss Finance Institute Research Paper Series
07-05, Swiss Finance Institute, revised Mar 2007.
- Peter Bossaerts & Charles Plott & William R. Zame, 2007. "Prices and Portfolio Choices in Financial Markets: Theory, Econometrics, Experiments," Econometrica, Econometric Society, vol. 75(4), pages 993-1038, 07.
- Michael B. Gordy, 2002.
"A risk-factor model foundation for ratings-based bank capital rules,"
Finance and Economics Discussion Series
2002-55, Board of Governors of the Federal Reserve System (U.S.).
- Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
- Jean-Pierre Zigrand & Hyun Song Shin & Jon Danielsson, 2010. "Risk Appetite and Endogenous Risk," FMG Discussion Papers dp647, Financial Markets Group.
- Michael Magill & Martine Quinzii, 1997. "Which improves welfare more: A nominal or an indexed bond?," Economic Theory, Springer, vol. 10(1), pages 1-37.
- Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer, vol. 12(2), pages 259-292.
- Grandmont, Jean-Michel, 1977. "Temporary General Equilibrium Theory," Econometrica, Econometric Society, vol. 45(3), pages 535-72, April.
- Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
- Sabarwal Tarun, 2003. "Competitive Equilibria With Incomplete Markets and Endogenous Bankruptcy," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-42, January.
- Gyutaeg Oh, 1996. "Some Results in the CAPM with Nontraded Endowments," Management Science, INFORMS, vol. 42(2), pages 286-293, February.
- Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Official Publications).
If references are entirely missing, you can add them using this form.