Asset classification under the IFRS 9 framework for the construction of a banking investment portfolio

Rui Brito (rbrito@uc.pt) and Pedro Alarcão Judice
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Pedro Alarcão Judice: ISCTE Business Research Unit

No 2020-06, CeBER Working Papers from Centre for Business and Economics Research (CeBER), University of Coimbra

Abstract: In this paper we perform a quantitative analysis, under the IFRS 9 framework, on the tradeoff of classifying a financial asset at amortized cost versus at fair value. We define and implement a banking impairment model in order to quantify the forward-looking expected credit loss. Based on the suggested impairment model we conduct a backtest on the 10-year Portuguese Government bonds, for the time period from January 2003 to December 2019. The Portuguese bonds’ history constitutes a very rich data set for our experiment, as these bonds have experienced significant downgrades during the 2011-2014 financial crisis. We suggest a quantitative and systematic approach in order to find efficient allocations, in an income/downside comprehensive income bi-dimensional space. Resorting to stochastic simulation, we show a possible approach to mitigate the estimation error ingrained in the proposed bi-objective stochastic model. Finally, we assess the out-of-sample performance of some of the suggested efficient allocations.

Keywords: Asset Classification; Backtesting; IFRS 9; Derivative-Free Optimization; Sensitivity Analysis; Stochastic Simulation. (search for similar items in EconPapers)
JEL-codes: C44 C51 C61 C63 C88 G11 G24 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2020-05
New Economics Papers: this item is included in nep-fmk and nep-ore
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