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Credit risk in general equilibrium

Jürgen Eichberger, Klaus Rheinberger () and Martin Summer ()

No 1445, Working Paper Series from European Central Bank

Abstract: Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery rate. In reality these parameters are the result of the interaction of many market participants: They are endogenous. We develop a general equilibrium model with endogenous credit risk that can be viewed as an extension of the capital asset pricing model. We analyze equilibrium prices of securities as well as equilibrium allocations in the presence of credit risk. We use the model to discuss the conceptual underpinnings of the approach to risk weight calibration for credit risk taken by the Basel Committee. JEL Classification: G32, G33, G01, D52

Keywords: banking regulation; credit risk; endogenous risk; systemic risk (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-ban and nep-rmg
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Related works:
Journal Article: Credit risk in general equilibrium (2014) Downloads
Working Paper: Credit Risk in General Equilibrium (2014) Downloads
Working Paper: Credit Risk in General Equilibrium (2011) Downloads
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