Sokolov, Yuri (2010): Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model.
Download (666kB) | Preview
The recent economic crisis on the demand side of the economy affects the trends and volatilities of the exchange rates as well as the operating conditions of borrowers in emerging market economies. But the exchange rate depreciation creates both winners and losers. With a weaker exchange rate, exporters and net holders of foreign assets will benefit, and vice verse, those relying on import and net debtors in foreign currency will be hurt. This paper presents a simple FX adjustment framework within Factor Endogenous Behaviour Aggregation (FEBA) approach* based on the decomposition of the competitiveness factor into components with meaningful behaviour content and subsequent collapsing into the Adjustment Index. The setup, while being simple, nicely captures non-linear and non-symmetric nature of the FX risk impact on bank’s credit portfolio and could be very useful for modeling credit risk.
*The approach was set up in “Interaction between market and credit risk: Focus on the endogeneity of aggregate risk” and mentioned in Roubini Global Economic Digest as “Advance in Credit Risk Management”.
|Item Type:||MPRA Paper|
|Original Title:||Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model|
|English Title:||Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model|
|Keywords:||exchange rate, factor modeling, competitiveness, credit risk, market risk|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill
D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications
A - General Economics and Teaching > A1 - General Economics > A10 - General
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Yuri I. Sokolov|
|Date Deposited:||06. Dec 2010 01:01|
|Last Modified:||02. Mar 2013 05:37|
BCBS, "Range of practices and issues in economic capital frameworks", 2009, BIS.
Bernanke B., "The great moderation", Remarks at the meetings of the Eastern Economic Association, Washington DC, 2004, BIS.
Capuano C., Chan-Lau J., Gasha G., Medeiros C., Santos A., Souto M., "Recent Advances in Credit Risk Modeling", 2009, International Monetary Fund.
Cavallo M., Kisselev K., Perri F., Roubini N., "Exchange rate overshooting and the costs of floating", 2002, SSRN.
Cornaglia A., Morone M., "Rating philosophy and dynamic properties of internal rating systems: A general framework and an application to backtesting", Intesa Sanpaolo Group, 2009, MPRA.
Čihák M., "Introduction to Applied Stress Testing", 2007, IMF Working Paper, International Monetary Fund.
Chan-Lau J., "FX Adjusted Local Currency Spreads", 2008, International Financial Corporation.
Gylfason T., "The Real Exchange Rate Always Floats", 2002, SSRN.
Furman, J. and Stiglitz J. E., "Economic crises: evidence and insights from East Asia", 1998, Brookings Papers on Economic Activity.
Hartmann P., Kwast M. and Praet P., "Towards the integrated measurement and management of market and credit risk: The dangers of compounding versus diversification", 2009, VoxEU.
Juravleva G., "Economics", ISBN: 5-7975-0368-9, 2001.
Krugman P., "The Return of Depression Economics and the Crisis of 2008", 2009, W.W. Norton & Company.
Mishkin F., "Global financial instability: framework, events, issues", 1999, Journal of Economic Perspectives.
RGE Digest "Advances in Credit Risk Management" http://www.roubini.com/topic/ banking-and-risk-management.php, 2010, Roubini Global Economics.
S&P, "Rating Methodology: Evaluating the Issuer", http://www2.standardandpoors.com/ spf/pdf/fixedincome/methodology.pdf, S&P.
Sokolov Y., "Interaction between market and credit risk: Focus on the endogeneity of aggregate risk", 2009, MPRA.
Vallis V., "Stability of a through-the cycle rating system during a financial crisis", 2006, Financial Stability Institute, Central Bank of Argentina.
Available Versions of this Item
- Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model. (deposited 06. Dec 2010 01:01) [Currently Displayed]