Munich Personal RePEc Archive

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

Sokolov, Yuri (2012): Modeling risk in a dynamically changing world: from association to causation.

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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.

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