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Credit risk in general equilibrium

Author

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  • Eichberger, Jürgen
  • Rheinberger, Klaus
  • Summer, Martin

Abstract

Credit 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

Suggested Citation

  • Eichberger, Jürgen & Rheinberger, Klaus & Summer, Martin, 2012. "Credit risk in general equilibrium," Working Paper Series 1445, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20121445
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    References listed on IDEAS

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    Cited by:

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    2. Florin Bidian & Camelia Bejan, 2015. "Martingale properties of self-enforcing debt," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(1), pages 35-57, September.
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    5. Deimante Teresiene & Beatrice Gudaviciute, 2021. "Counterparty risk management framework: theoretical approach in COVID-19 environment," Technium Social Sciences Journal, Technium Science, vol. 17(1), pages 184-193, March.

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    More about this item

    Keywords

    banking regulation; credit risk; endogenous risk; systemic risk;
    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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G01 - Financial Economics - - General - - - Financial Crises
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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