Credit rating migration risk and interconnectedness in a corporate lending network

Masayasu Kanno

Research in International Business and Finance, 2020, vol. 54, issue C

Abstract: This study assesses the credit rating migration risk and interconnectedness in Japan's corporate lending market during the fiscal years 2008–2015. First, the study conducts a portfolio credit risk analysis by using outstanding lending data with borrowers’ and lenders’ names. The results show an expected shortfall with tail dependence of t-copula captures the heavy-tailed risk of Japanese institutions. The study also measures credit risk exposures and credit risk amounts by industry sector, and evaluates sector concentration risk. Subsequently, the study analyzes the network structure of lending contracts using network centrality measures. From the perspective of the network, institutions play a central role in terms of degree centrality. Further, the study undertakes a stress test using a historical economic scenario pertaining to a credit rating migration matrix shortly after the Lehman Brothers’ bankruptcy. The test finds a much sparser network structure due to a large number of firm defaults. The study's analysis offers banks and insurers important implications regarding credit risk management of corporate lending.

Keywords: Credit rating migration risk; Sector concentration; Interconnectedness; Centrality measure; Credit value at risk and expected shortfall; Stress test (search for similar items in EconPapers)
JEL-codes: D85 F37 G10 G28 G32 L14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:54:y:2020:i:c:s0275531919310487

DOI: 10.1016/j.ribaf.2020.101282

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