Allen, David E and Powell, Robert (2008): Structural Credit Modelling and Its Relationship to Market Value at Risk: An Australian Sectoral Perspective.
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Abstract
Credit risk modelling has become increasingly important to Banks since the advent of Basel II which allows Banks with sophisticated modelling techniques to use internal models for the purpose of calculating capital requirements. A high level of credit risk is often the key reason behind banks failing or experiencing severe difficulty. The management of sectoral concentration is a critical component of credit risk management, as over concentration of credit in sectors can be a significant contributor to difficulties experienced by Banks. Conditional Value at Risk (CVaR) is gaining popularity as a measurement of credit risk, with the recognition that high lending losses are often impacted by a small number of extreme events. This study examines sectoral probability of default (PD) in an Australian context based on the structural approach of Merton (1974), and more recently modified and popularised by KMV Corporation (Crosbie & Bohn, 2003). In addition to examining PD, we introduce a CVaR type component into structural modelling which we term conditional probability of default (CPD). We also examine the interaction between sectoral credit and market risk using VaR and CVaR models for market risk, and PD and CPD models for credit risk. Significant rank correlation is found between all of the approaches used, showing that those sectors which are risky from a credit perspective are not significantly different from those which are risky from a market perspective.
Item Type:  MPRA Paper 

Original Title:  Structural Credit Modelling and Its Relationship to Market Value at Risk: An Australian Sectoral Perspective 
Language:  English 
Keywords:  Value at risk; Conditional value at risk; Credit risk, Conditional probabilities of default; Structural modelling 
Subjects:  C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C10  General G  Financial Economics > G1  General Financial Markets > G10  General G  Financial Economics > G2  Financial Institutions and Services > G21  Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages 
Item ID:  47206 
Depositing User:  David E Allen 
Date Deposited:  26. May 2013 19:11 
Last Modified:  26. May 2013 19:18 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/47206 
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