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Interaction between market and credit risk: Focus on the endogeneity of aggregate risk

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  • Sokolov, Yuri

Abstract

As shown in the recent BCBS papers market and credit risks could reinforce each other in certain circumstances, meaning the sum of the parts might be less than an estimate of risk that takes into account the interactions between the two. Market risk factors have an ambiguous impact on the firms' repayment conditions because depreciation of domestic currency for instance favors exporters and harms importers. Within the task of a ‘top-down’ aggregation of market and credit risks this contribution presents a general framework to economic capital measurement and active portfolio management splitting exogenous risk factor influence throw different channels. The approach implies an exploiting of banks information about the clients' trade and cash flows related to global economic activity. The way to single out exposures to counterparties belonging to the same pattern of behavioural reactions to the market factors are considered as the bedrock of Factor endogenous behaviour aggregation (FEBA) approach.

Suggested Citation

  • Sokolov, Yuri, 2009. "Interaction between market and credit risk: Focus on the endogeneity of aggregate risk," MPRA Paper 18245, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:18245
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    File URL: https://mpra.ub.uni-muenchen.de/18245/1/MPRA_paper_18245.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Sokolov, Yuri, 2010. "Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model," MPRA Paper 27222, University Library of Munich, Germany.
    2. Constantin ANGHELACHE & Gabriela Victoria ANGHELACHE & Madalina – Gabriela Anghel & Georgiana NITA, 2016. "General Notions on Banking Risks," Romanian Statistical Review Supplement, Romanian Statistical Review, vol. 64(5), pages 7-10, May.
    3. Sokolov, Yuri, 2012. "Modeling risk in a dynamically changing world: from association to causation," MPRA Paper 40096, University Library of Munich, Germany.

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    More about this item

    Keywords

    integrated analysis of market and credit risk; risk management; endogenous behaviour; concentration risk.;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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