Yang, Bill Huajian (2014): Modeling Systematic Risk and PointinTime Probability of Default under the Vasicek Asymptotic Single Risk Factor Model Framework. Published in: Journal of Risk Model Validation , Vol. 8, No. 3 (18 September 2014)

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Abstract
Systematic risk has been a focus for stress testing and risk capital assessment. Under the Vasicek asymptotic single risk factor model framework, entity default risk for a risk homogeneous portfolio divides into two parts: systematic and entity specific. While entity specific risk can be modelled by a probit or logistic model using a relatively short period of portfolio historical data, modeling of systematic risk is more challenging. In practice, most default risk models do not fully or dynamically capture systematic risk. In this paper, we propose an approach to modeling systematic and entity specific risks by parts and then aggregating together analytically. Systematic risk is quantified and modelled by a multifactor Vasicek model with a latent residual, a factor accounting for default contagion and feedback effects. The asymptotic maximum likelihood approach for parameter estimation for this model is equivalent to least squares linear regression. Conditional entity PDs for scenario tests and throughthecycle entity PD all have analytical solutions. For validation, we model the pointintime entity PD for a commercial portfolio, and stress the portfolio default risk by shocking the systematic risk factors. Rating migration and portfolio loss are assessed.
Item Type:  MPRA Paper 

Original Title:  Modeling Systematic Risk and PointinTime Probability of Default under the Vasicek Asymptotic Single Risk Factor Model Framework 
Language:  English 
Keywords:  pointintime PD, throughthecycle PD, Vasicek model, systematic risk, entity specific risk, stress testing, rating migration, scenario loss 
Subjects:  B  History of Economic Thought, Methodology, and Heterodox Approaches > B4  Economic Methodology C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General C  Mathematical and Quantitative Methods > C5  Econometric Modeling E  Macroeconomics and Monetary Economics > E6  Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook G  Financial Economics > G1  General Financial Markets > G18  Government Policy and Regulation G  Financial Economics > G3  Corporate Finance and Governance 
Item ID:  59025 
Depositing User:  Dr. Bill Huajian Yang 
Date Deposited:  02 Oct 2014 02:52 
Last Modified:  26 Sep 2019 12:23 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/59025 