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Interactions between Credit and Market Risk, Diversification vs Compounding effects

Szybisz, Martin Andres (2019): Interactions between Credit and Market Risk, Diversification vs Compounding effects.

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Abstract

The relations between credit and market risk have deep roots in financial and economic theory. After a brief theory review, we select five variables and calculate their historical shortfalls. This shortfall is taken as a proxy for market risk quantification. Relating this shortfall to non performing loans as a proxy for credit risk allows us to study the nature of the relation between credit and market risk. The nonlinearity of the relation is discussed in view of diversification and compounding effects.

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