Modeling Portfolio Credit Risk Taking into Account the Default Correlations Using a Copula Approach: Implementation to an Italian Loan Portfolio

Author:

Di Clemente Annalisa

Abstract

This work aims to illustrate an advanced quantitative methodology for measuring the credit risk of a loan portfolio allowing for diversification effects. Also, this methodology can allocate the credit capital coherently to each counterparty in the portfolio. The analytical approach used for estimating the portfolio credit risk is a binomial type based on a Monte Carlo Simulation. This method takes into account the default correlations among the credit counterparties in the portfolio by following a copula approach and utilizing the asset return correlations of the obligors, as estimated by rigorous statistical methods. Moreover, this model considers the recovery rates as stochastic and dependent on each other and on the time until defaults. The methodology utilized for coherently allocating credit capital in the portfolio estimates the marginal contributions of each obligor to the overall risk of the loan portfolio in terms of Expected Shortfall (ES), a risk measure more coherent and conservative than the traditional measure of Value-at-Risk (VaR). Finally, this advanced analytical structure is implemented to a hypothetical, but typical, loan portfolio of an Italian commercial bank operating across the overall national country. The national loan portfolio is composed of 17 sub-portfolios, or geographic clusters of credit exposures to 10,500 non-financial firms (or corporates) belonging to each geo-cluster or sub-portfolio. The outcomes, in terms of correlations, portfolio risk measures and capital allocations obtained from this advanced analytical framework, are compared with the results found by implementing the Internal Rating Based (IRB) approach of Basel II and III. Our chief conclusion is that the IRB model is unable to capture the real credit risk of loan portfolios because it does not take into account the actual dependence structure among the default events, and between the recovery rates and the default events. We underline that the adoption of this regulatory model can produce a dangerous underestimation of the portfolio credit risk, especially when the economic uncertainty and the volatility of the financial markets increase.

Publisher

MDPI AG

Reference49 articles.

1. On the coherence of expected shortfall

2. Coherent Measures of Risk

3. Double Impact: Credit Risk Assessment and Collateral Value;Chabaane;Revue Finance,2004

Cited by 2 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

同舟云学术

1.学者识别学者识别

2.学术分析学术分析

3.人才评估人才评估

"同舟云学术"是以全球学者为主线,采集、加工和组织学术论文而形成的新型学术文献查询和分析系统,可以对全球学者进行文献检索和人才价值评估。用户可以通过关注某些学科领域的顶尖人物而持续追踪该领域的学科进展和研究前沿。经过近期的数据扩容,当前同舟云学术共收录了国内外主流学术期刊6万余种,收集的期刊论文及会议论文总量共计约1.5亿篇,并以每天添加12000余篇中外论文的速度递增。我们也可以为用户提供个性化、定制化的学者数据。欢迎来电咨询!咨询电话:010-8811{复制后删除}0370

www.globalauthorid.com

TOP

Copyright © 2019-2024 北京同舟云网络信息技术有限公司
京公网安备11010802033243号  京ICP备18003416号-3