Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model
AbstractThe recent economic crisis on the demand side of the economy affects the trends and volatilities of the exchange rates as well as the operating conditions of borrowers in emerging market economies. But the exchange rate depreciation creates both winners and losers. With a weaker exchange rate, exporters and net holders of foreign assets will benefit, and vice verse, those relying on import and net debtors in foreign currency will be hurt. This paper presents a simple FX adjustment framework within Factor Endogenous Behaviour Aggregation (FEBA) approach* based on the decomposition of the competitiveness factor into components with meaningful behaviour content and subsequent collapsing into the Adjustment Index. The setup, while being simple, nicely captures non-linear and non-symmetric nature of the FX risk impact on bank’s credit portfolio and could be very useful for modeling credit risk. *The approach was set up in “Interaction between market and credit risk: Focus on the endogeneity of aggregate risk” and mentioned in Roubini Global Economic Digest as “Advance in Credit Risk Management”.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 27222.
Date of creation: 05 Dec 2010
Date of revision:
exchange rate; factor modeling; competitiveness; credit risk; market risk;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- A10 - General Economics and Teaching - - General Economics - - - General
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-18 (All new papers)
- NEP-BAN-2010-12-18 (Banking)
- NEP-MAC-2010-12-18 (Macroeconomics)
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.:
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"The Real Exchange Rate Always Floats,"
Australian Economic Papers,
Wiley Blackwell, vol. 41(4), pages 369-381, December.
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- Jose Giancarlo Gasha & Andre Santos & Jorge A. Chan-Lau & Carlos I. Medeiros & Marcos Souto & Christian Capuano, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 09/162, International Monetary Fund.
- Frederic S. Mishkin, 1999. "Global Financial Instability: Framework, Events, Issues," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 3-20, Fall.
- Cornaglia, Anna & Morone, Marco, 2009. "Rating philosophy and dynamic properties of internal rating systems: A general framework and an application to backtesting," MPRA Paper 14711, University Library of Munich, Germany.
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