Modeling risk in a dynamically changing world: from association to causation

Yuri Sokolov ()

MPRA Paper from University Library of Munich, Germany

Abstract: The current crisis causes numerous economic uncertainties, such as a break-up of the European currency union, and a Greek exit from the euro area to boost the competitiveness by means of devaluation of national currency. When a factor such as exchange rate is expected to have a significant effect on the borrowers’ creditworthiness or a shift in risk regime may have occurred, risk management models based on backward-looking statistical methods are inadequate. Unlike the other approaches to risk modeling, the discussed approach for dynamic risk modeling doesn't ignore causation in favor of correlation and thus it is far more proactive. In contrast to existing risk models, FX rate is considered as a causal factor, which induces a negative correlation among default realizations and reveals ex ante dangerous risk concentrations with the clear economic and behavioral content.

Keywords: Correlation; causation; dynamic risk modeling; credit portfolio management; factor modeling; competitiveness; exchange rate; FEBA approach (search for similar items in EconPapers)
JEL-codes: E37 E47 G20 G21 G28 G30 G32 (search for similar items in EconPapers)
Date: 2012-07-16
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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