One-factor model of liquidity risk

Maksim Osadchiy

MPRA Paper from University Library of Munich, Germany

Abstract: Credit and liquidity risks at the bank level depend on idiosyncratic and systematic (market) risks at the firm level. Portfolio effect transforms idiosyncratic risk into expected factor and leaves only systematic risk. Dependence only on market risk allows evaluating credit and liquidity risk using one-factor models. Since market risk is common to both credit risk and liquidity risk, it is useful to evaluate their joint distribution in a closed form. The one-factor Vasicek model was designed to evaluate credit risk – the probability distribution of the portfolio loss. The one-factor model proposed in the paper is designed to evaluate liquidity risk. Combination of credit risk and liquidity risk models is used to evaluate the joint distribution of credit and liquidity risks.

Keywords: liquidity risk; credit risk; Vasicek model; barrier option; IRB (search for similar items in EconPapers)
JEL-codes: G21 G32 G33 (search for similar items in EconPapers)
Date: 2022-07-24
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
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