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

Yuri Sokolov ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: integrated analysis of market and credit risk; risk management; endogenous behaviour; concentration risk. (search for similar items in EconPapers)
JEL-codes: E37 E47 G20 G21 G28 G30 G32 (search for similar items in EconPapers)
Date: 2009-11-08
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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