This paper presents a new approach to modeling conditional credit loss distributions. Asset value changes of firms in a credit portfolio are linked to a dynamic global macroeconometric model, ...allowing macroeffects to be isolated from idiosyncratic shocks from the perspective of default (and hence loss). Default probabilities are driven primarily by how firms are tied to business cycles, both domestic and foreign, and how business cycles are linked across countries. We allow for firm-specific business cycle effects and the heterogeneity of firm default thresholds using credit ratings. The model can be used, for example, to compute the effects of a hypothetical negative equity price shock in South East Asia on the loss distribution of a credit portfolio with global exposures over one or more quarters. We show that the effects of such shocks on losses are asymmetric and non-proportional, reflecting the highly nonlinear nature of the credit risk model.
A review of recent books on credit risk Schuermann, Til
Journal of Applied Econometrics,
January/February 2005, Letnik:
20, Številka:
1
Journal Article, Book Review
Recenzirano
A review of 3 books on credit risk is presented. They are: 1. Credit Risk: Pricing, Measurement and Management, by Darrell Duffie and Kenneth J. Singleton, 2. Credit Risk Modeling: Theory and ...Applications, by David Lando, and 3. Credit Derivatives Pricing Models: Models, Pricing and Implementation, by Philipp J. Schonbucher.
This paper examines the impact of
neglected heterogeneity on credit risk. We show that neglecting heterogeneity in firm returns and/or default thresholds leads to
underestimation of expected losses ...(EL), and its effect on portfolio risk is ambiguous. Once EL is controlled for, the impact of neglecting parameter heterogeneity is complex and depends on the source and degree of heterogeneity. We show that ignoring differences in default thresholds results in overestimation of risk, while ignoring differences in return correlations yields ambiguous results. Our empirical application, designed to be typical and representative, combines both and shows that neglected heterogeneity results in
overestimation of risk. Using a portfolio of U.S. firms we illustrate that heterogeneity in the default threshold or probability of default, measured for instance by a credit rating, is of first order importance in affecting the shape of the loss distribution: including ratings heterogeneity alone results in a 20% drop in loss volatility and a 40% drop in 99.9% VaR, the level to which the risk weights of the New Basel Accord are calibrated.
Robust Capital Regulation Acharya, Viral; Mehran, Hamid; Schuermann, Til ...
Current issues in economics and finance,
04/2012, Letnik:
18, Številka:
4
Journal Article
Regulators and markets can find the balance sheets of large financial institutions difficult to penetrate, and they are mindful of how undercapitalization can aeate incentives to take on excessive ...risk. This study proposes a novel framework for capital regulation that addresses banks' incentives to take on excessive risk and leverage. The framework consists of a special capital account in addition to a core capital requirement. The special account would accrue to a bank's shareholders as longos the bank is solvent, but would pass to the bank's regulators - rather than its creditors - if the bank fails. By design, this special account thus limits risk taking, but ensures that creditors' disciplining incentives are preserved. PUBLICATION ABSTRACT
The 1990-91 recession weighed heavily on banks. Low profits, poor capitalization, and a high incidence of nonperforming loans during this period made it especially hard for banks to weather the ...economic setbacks and continue lending. In the 2001 recession, by contrast, banks were in a much stronger position. This edition of Current Issues examines why banks fared better in the most recent recession. Specifically, this issue considers how much of their success stems from skill on the part of bank managers and how much stems from simple luck. It is found that banks' improved performance in the 2001 recession is attributable in large part to the skill shown by bank managers. To analyze the effect of skill on bank performance, two key tools of bank managers are considered: 1. risk management and 2. the strategic pursuit of new markets and new sources of revenue.
This chapter addresses how the known (K), the unknown (u), and the unknowable (U) vary by risk type within banking.¹ We propose that knowledge of risk differs systematically by risk type—for example, ...with more being known about market risk than credit risk, and less being known about nonfinancial risks than financial risks. Understanding the nature of the differences across risk types and their relative contribution to total earnings volatility can shed light on the portion of the risk space within banking that is known and knowable—and hence manageable—versus unknown and unmanageable.
Our primary concern is to describe
This substantial volume has two principal objectives. First it provides an overview of the statistical foundations of Simulation-based inference. This includes the summary and synthesis of the many ...concepts and results extant in the theoretical literature, the different classes of problems and estimators, the asymptotic properties of these estimators, as well as descriptions of the different simulators in use. Second, the volume provides empirical and operational examples of SBI methods. Often what is missing, even in existing applied papers, are operational issues. Which simulator works best for which problem and why? This volume will explicitly address the important numerical and computational issues in SBI which are not covered comprehensively in the existing literature. Examples of such issues are: comparisons with existing tractable methods, number of replications needed for robust results, choice of instruments, simulation noise and bias as well as efficiency loss in practice.
The Global Economy Barbara Keys; Til Schuermann
Fourteen Points for the Twenty-First Century,
05/2020
Book Chapter
The global economy is much like the sleek yachts that race in the America’s Cup. Agile and highly engineered, the sailboats move with astonishing speed—but they also capsize easily. The global ...economy, too, runs at stunning speeds, with information and capital traveling across borders in the blink of an eye. But like racing yachts, a global economic system designed for speed and efficiency is fragile. Today the global economy is vulnerable to shocks of devastating severity, and since the 1970s, the trend had been toward increasing vulnerability. The same interconnections that make the system so efficient also make it
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