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on Risk Management |
| By: | Carlos Pérez Montes (Banco de España) |
| Abstract: | This article estimates a general credit risk model with both macroeconomic and latent credit factors for Spanish banks during the period 2004-2010. The proposed framework allows to estimate with bank level data both the standard credit risk model of Basel II and generalized models. I fi nd evidence of persistence in the credit latent factor and of a signifi cant effect of GDP growth and interbank rates on loan default rates. The estimated default correlation is low across specifications. The model is also used to calculate the impact on the probabilities of default of stressed economic scenarios. |
| Keywords: | credit risk, default correlation, stress test, state space model, bootstrap, MLE |
| JEL: | E0 G21 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1305&r=rmg |
| By: | Trapp, Monika; Wewel, Claudio |
| Abstract: | In this paper we study systemic risk for the US and Europe. We show that banks' exposures to common risk factors are crucial for systemic risk. We come to this conclusion by first showing that relations between US and European banks are smaller than within each region. We then show that European banks react more strongly to the onset of the financial crisis than US ones. Regarding the consequences of systemic risk, we show that dependence between the banking sector and a wide range of real sectors is limited. Our results imply that regulators and supervisors should address international bank dependencies arising from common risk factors, while recessions in real sectors due to bank defaults should be a secondary concern. -- |
| Keywords: | systemic risk,banking sector,real sectors,regulation,copula |
| JEL: | G01 G15 G18 G21 G28 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1210r&r=rmg |
| By: | Xiangjin B. Chen; Param Silvapulle; Mervyn Silvapulle |
| Abstract: | This paper investigates stock-bond portfolios’ tail risks such as value-at-risk (VaR) and expected shortfall (ES), and the way in which these measures have been affected by the global financial crisis. The semiparametric t-copula is found to be adequate for modelling stock-bond joint distributions of G7 countries and Australia. Empirical results show that weak (negative) dependence has increased for seven countries after the crisis, while it has decreased for Italy. However, both VaR and ES have increased for all eight countries. Before the crisis, the minimum portfolio VaR and ES were achieved at an interior solution only for the US, the UK, Australia, Canada and Italy. After the crisis, the corner solution was found for all eight countries. Evidence of “flight to quality†and “safety first†investor behaviour was found to be strong, after the global financial crisis. The semiparametric t-copula adequately forecasts the outer-sample VaR. These findings have implications for global financial regulators and the Basel Committee, whose central focus is currently on increasing the capital requirements as a consequence of the recent global financial crisis. |
| Keywords: | Copula; Semiparametric method; Value-at-Risk; Investment decision |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:msh:ebswps:2013-14&r=rmg |
| By: | Bethke, Sebastian; Kempf, Alexander; Trapp, Monika |
| Abstract: | Diversification benefits depend on the correlation between assets. Unfortunately, asset correlation increases when it is most needed. We examine bond correlation using a broad sample of US corporate bonds. We find bond correlation to be higher during the financial crisis in 2008. Increased bond correlation results from higher correlation between corporate bond risk factors. Risk factor correlation increases when investor sentiment worsens. This suggests that corporate bond investors change their perception of risk factors, which results in higher risk factor correlation and finally higher bond correlation. -- |
| Keywords: | bond correlation,credit risk,liquidity,risk factor correlation,investor sentiment |
| JEL: | G11 G12 G32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:1306&r=rmg |
| By: | Georges Dionne; Olfa Maalaoui Chun |
| Abstract: | Using a real-time random regime shift technique, we identify and discuss two different regimes in the dynamics of credit spreads during 2002-2012: a liquidity regime and a default regime. Both regimes contribute to the patterns observed in credit spreads. The liquidity regime seems to explain the predictive power of credit risk on the 2007-2009 NBER recession, whereas the default regime drives the persistence of credit spreads over the same recession. Our results complement the recent dynamic structural models as well as monetary and credit supply effects models by empirically supporting two important patterns in credit spreads: the persistence and the predictive ability toward economic downturns. |
| Keywords: | Credit spread, credit default swaps, real-time regime detection, market risk, liquidity cycle, default cycle, credit cycle, NBER economic cycle |
| JEL: | C32 C52 C61 G12 G13 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1322&r=rmg |
| By: | Peter C. B. Phillips (Yale University, University of Auckland, University of Southampton & Singapore Management University); Shu-Ping Shi (The Australian National University); Jun Yu (Singapore Management University) |
| Abstract: | Recent work on econometric detection mechanisms has shown the effectiveness of recursive procedures in identifying and dating financial bubbles. These procedures are useful as warning alerts in surveillance strategies conducted by central banks and fiscal regulators with real time data. Use of these methods over long historical periods presents a more serious econometric challenge due to the complexity of the nonlinear structure and break mechanisms that are inherent in multiple bubble phenomena within the same sample period. To meet this challenge the present paper develops a new recursive flexible window method that is better suited for practical implementation with long historical time series. The method is a generalized version of the sup ADF test of Phillips, Wu and Yu (2011, PWY) and delivers a consistent date-stamping strategy for the origination and termination of multiple bubbles. Simulations show that the test significantly improves discriminatory power and leads to distinct power gains when multiple bubbles occur. An empirical application of the methodology is conducted on S&P 500 stock market data over a long historical period from January 1871 to December 2010. The new approach successfully identi.es the well-known historical episodes of exuberance and collapse over this period, whereas the strategy of PWY and a related CUSUM dating procedure locate far fewer episodes in the same sample range. |
| Keywords: | Date-stamping strategy; Flexible window; Generalized sup ADF test; Multiple bubbles, Rational bubble; Periodically collapsing bubbles; Sup ADF test; |
| JEL: | C15 C22 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:04-2013&r=rmg |