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Credit rating migration risk and interconnectedness in a corporate lending network

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  • Kanno, Masayasu

Abstract

This study assesses the credit rating migration risk and interconnectedness in Japan's corporate lending market during the fiscal years 2008–2015. First, the study conducts a portfolio credit risk analysis by using outstanding lending data with borrowers’ and lenders’ names. The results show an expected shortfall with tail dependence of t-copula captures the heavy-tailed risk of Japanese institutions. The study also measures credit risk exposures and credit risk amounts by industry sector, and evaluates sector concentration risk. Subsequently, the study analyzes the network structure of lending contracts using network centrality measures. From the perspective of the network, institutions play a central role in terms of degree centrality. Further, the study undertakes a stress test using a historical economic scenario pertaining to a credit rating migration matrix shortly after the Lehman Brothers’ bankruptcy. The test finds a much sparser network structure due to a large number of firm defaults. The study's analysis offers banks and insurers important implications regarding credit risk management of corporate lending.

Suggested Citation

  • Kanno, Masayasu, 2020. "Credit rating migration risk and interconnectedness in a corporate lending network," Research in International Business and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:riibaf:v:54:y:2020:i:c:s0275531919310487
    DOI: 10.1016/j.ribaf.2020.101282
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    More about this item

    Keywords

    Credit rating migration risk; Sector concentration; Interconnectedness; Centrality measure; Credit value at risk and expected shortfall; Stress test;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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