Adverse risk interaction: An integrated approach

Miloš Božović and Jelena Ivanović

Economic Modelling, 2017, vol. 65, issue C, 67-74

Abstract: This paper studies adverse interaction between credit and market risk. We develop a comprehensive Merton-type model, in which payment ability of borrowers is driven by the overall economic growth, while the level of their liabilities is sensitive to market variables. To illustrate the model, we apply numerical simulations to estimate credit, market and integrated Value at Risk from the loss distribution using industry-wide data from the Serbian banking sector. We show that—even after accounting for presence of market risk in the banking book—the total risk remains higher than the simple sum of credit and market risk. The results emphasize the importance of integrated approach to assessment of economic capital.

Keywords: risk interaction; integrated market and credit risk assessment; banking book; economic capital; macroeconomic stress tests (search for similar items in EconPapers)
JEL-codes: E44 G21 G28 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999317305783
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:65:y:2017:i:c:p:67-74

DOI: 10.1016/j.econmod.2017.04.029

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().