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Estimating the distribution of total default losses on the Spanish financial system

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  • García-Céspedes, Rubén
  • Moreno, Manuel

Abstract

This paper quantifies the credit risk loss distribution of the Spanish financial system by introducing a general Monte Carlo importance sampling (IS) approach. We start obtaining all the required information for the standard credit risk model. Then we quantify the loss distribution under the standard IS method and allocate the total risk over the different institutions in the Spanish financial system. We extend the current IS framework to deal with more general assumptions like random recoveries and market valuation. We also study the variability of the risk measures over the business cycle and the possible variability due to the model parameters uncertainty. Our results show that this approach can be very useful for banking supervisors from a macroprudential point of view and that the risk allocation can vary considerably depending on the valuation model under analysis.

Suggested Citation

  • García-Céspedes, Rubén & Moreno, Manuel, 2014. "Estimating the distribution of total default losses on the Spanish financial system," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 242-261.
  • Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:242-261
    DOI: 10.1016/j.jbankfin.2014.09.019
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Monte Carlo; Importance sampling; Credit risk; Risk allocation; VaR; Expected shortfall; C15; C63; G21;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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