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Assessment of Portfolio Credit Risk under Dynamic Default Correlation

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  • Aleksandr Matveev

    (Sovcombank)

Abstract

This paper describes a methodology to address topical issues in credit risk assessment under variable default correlation. The methodology solves the black box problem, typical of Markov regime switching, autoregressive conditional heteroscedasticity and other known models, accommodates heterogeneous loan portfolios, in contrast to the analytical approach to Value-at-Risk calculation, and provides for a variety of stress scenarios pursuant to the Bank of Russia's requirements. This methodology may be applied in such areas as internal capital adequacy assessment, supervisory stress testing, financial stability recovery plans, and internal ratings-based models for credit risk assessment. The approaches based on the presented methodology have been integrated into the risk management system of one of the top Russian banks by assets.

Suggested Citation

  • Aleksandr Matveev, 2025. "Assessment of Portfolio Credit Risk under Dynamic Default Correlation," Russian Journal of Money and Finance, Bank of Russia, vol. 84(1), pages 129-142, March.
    • Handle: RePEc:bkr:journl:v:84:y:2025:i:1:p:129-142
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    References listed on IDEAS

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    More about this item

    Keywords

    credit risk; banking regulation; default correlation; portfolio analysis; Monte Carlo method;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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