Credit risk concentrations under stress

Gabriel Bonti, Michael Kalkbrener, Christopher Lotz and Gerhard Stahl

Journal of Credit Risk

Abstract: ABSTRACT This article deals with methods for identifying as well as stressing risk concentrations in credit portfolios, in particular concentrations caused by large exposures to a single sector or to several highly correlated sectors. We present a general and yet computationally efficient framework for implementing stress scenarios in a multifactor credit portfolio model and illustrate the proposed methodology by stressing a large investment banking portfolio. Although the methodology is developed in a particular factor model, the main concept – stressing sector concentration through a truncation of the distribution of the risk factors – is independent of the model specification. We introduce the concept of factor concentration that formalizes the proposed approach and analyze its mathematical properties.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ1:2160580

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