Business cycle effects on Portfolio Credit Risk: scenario generation through Dynamic Factor analysis

Andrea Cipollini () and giuseppe missaglia
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giuseppe missaglia: iccrea

Finance from EconWPA

Abstract: In this paper, we focus on measuring the risk associated to a bank loan portfolio. In particular, we depart from the standard one factor model representation of portfolio credit risk. In particular, we consider an hetrogeneous portfolio, and we account for stochastic dependent recoveries. We also examine the influence of either one systemic shock (interpreted as the state of the business cycle) or two systemic shocks (interpreted as demand and supply innovations) on portfolio credit risk. The identification and estimation of the common shocks is obtained by fitting a Dynamic Factor model to a large number of macro credit drivers. The scenarios are obtained by employing Montecarlo stochastic simulation.

Keywords: Risk; management; default; correlation; Dynamic; Factor (search for similar items in EconPapers)
JEL-codes: C32 E17 G20 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-mac and nep-rmg
Date: 2005-02-11
Note: Type of Document - pdf; pages: 21
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0502010

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