Model-Based Measurement of Sector Concentration Risk in Credit Portfolios

Martin Hibbeln ()
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Martin Hibbeln: Technische Universität Braunschweig

Chapter Chapter 5 in Risk Management in Credit Portfolios, 2010, pp 183-236 from Springer

Abstract: Abstract The focus of this chapter is on sector concentrations. This type of concentration risk can occur if there is more than one systematic risk factor that influences credit defaults. The main research questions that are analyzed in this chapter are: How can existing approaches for measuring sector concentration risk be modified and adjusted to be consistent with the Basel framework? Is the risk measure Value at Risk problematic when dealing with sector concentration risk? Which methods are capable of measuring concentration risk and how good do they perform in comparison? What are the advantages and disadvantages of these methods? In order to deal with these questions, it is initially determined how a multi-factor model can be parameterized to obtain a capital requirement which is consistent with Basel II. Furthermore, the models of Pykhtin (Risk 17(3):85–90, 2004), Cespedes et al. (J Credit Risk, 2(3):57–85, 2006), and Düllmann (Measuring business sector concentration by an infection model. Discussion Paper, Series 2: Banking and Financial Studies, Deutsche Bundesbank, (3), 2006), which have been developed to approximate the risk in the presence of sector concentrations, are presented and modified. Then, the accuracy of these models concerning their ability to measure sector concentration risk is compared.

Keywords: Capital Requirement; Credit Portfolio; Sector Concentration; Portfolio Loss; Default Correlation (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:spr:conchp:978-3-7908-2607-4_5

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DOI: 10.1007/978-3-7908-2607-4_5

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