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Integrating Credit and Market Risk: A Factor Copula based Method☆

Published on Jan 1, 2013in Procedia Computer Science
· DOI :10.1016/j.procs.2013.05.085
Changzhi Liang5
Estimated H-index: 5
(CAS: Chinese Academy of Sciences),
Xiaoqian Zhu7
Estimated H-index: 7
(CAS: Chinese Academy of Sciences)
+ 3 AuthorsJianping LiXiaolei19
Estimated H-index: 19
(CAS: Chinese Academy of Sciences)
Cite
Abstract
Abstract This paper presents a factor copula model for the integration of Chinese commercial banks’ credit risk and market risk. By defining the dependence structure through a set of common factors reflecting the macro-economic situation, this model reveals the intrinsic correlation between credit risk and market risk. We derive the integration process with factor copula and generate common factors by performing a principal component analysis on 4 different macro-economic indicators that have impact on bank's profit, namely the GDP growth, M2 growth, benchmark for loan rate, and the ratio of new loans to GDP. In the empirical study, 15 Chinese listed banks are chosen to construct the model. The results are compared with that of elliptical copulas and Archimedean copulas, we find that factor copula gives a more prudential result in risk integration.
  • References (17)
  • Citations (6)
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References17
Newest
Published on Jan 2, 2017in Journal of Business & Economic Statistics 2.72
Dong Hwan Oh5
Estimated H-index: 5
(Federal Reserve System),
Andrew J. Patton35
Estimated H-index: 35
(Duke University)
This article presents flexible new models for the dependence structure, or copula, of economic variables based on a latent factor structure. The proposed models are particularly attractive for relatively high-dimensional applications, involving 50 or more variables, and can be combined with semiparametric marginal distributions to obtain flexible multivariate distributions. Factor copulas generally lack a closed-form density, but we obtain analytical results for the implied tail dependence using...
Jianping LiXiaolei19
Estimated H-index: 19
,
Jichuang Feng6
Estimated H-index: 6
+ 1 AuthorsMinglu Li6
Estimated H-index: 6
Recently, the number of consultative documents and research papers that discuss risk integration has grown considerably. This paper presents a comprehensive review of the work done on risk integration in the banking industry. This survey includes: (1) risk integration methods within regulatory frameworks and the banking industry; (2) challenges of risk integration; (3) risk interaction mechanisms; (4) development of risk integration approaches; (5) risk interaction results: diversification versu...
Published on May 1, 2012in Information Sciences 5.52
Jianping LiXiaolei19
Estimated H-index: 19
(CAS: Chinese Academy of Sciences),
Minglu Li6
Estimated H-index: 6
(National Natural Science Foundation of China)
+ 1 AuthorsHao Song4
Estimated H-index: 4
(CAS: Chinese Academy of Sciences)
The growing demand for higher trustworthiness of software poses an unprecedented challenge to the software industry. Risk management is the important part for high quality software development processes. However, under the constraints of project cost and duration, it is very difficult to establish the budget for risk management. To integrate efficient risk management and pure software process is the goal of this paper. We propose a software process model with risk management and cost control mod...
Published on Jul 7, 2010
Kalyanmoy Deb91
Estimated H-index: 91
(IITK: Indian Institute of Technology Kanpur)
This book constitutes the refereed proceedings of the 5th International Conference on Evolutionary Multi-Criterion Optimization, EMO 2009, held in Nantes, France in April 2009. The 39 revised full papers presented together with 5 invited talks were carefully reviewed and selected from 72 submissions. The papers are organized in topical sections on theoretical analysis, uncertainty and noise, algorithm development, performance analysis and comparison, applications, MCDM Track, Many objectives, al...
Published on Jun 1, 2010in European Journal of Operational Research 3.81
Peter Grundke5
Estimated H-index: 5
(University of Osnabrück)
Banks and other financial institutions try to compute the necessary amount of total capital that they need for absorbing stochastically dependent losses from different risk types (e.g., credit risk and market risk). Two sophisticated procedures of this so-called integrated risk management are the top-down and the bottom-up approaches. When banks apply a more sophisticated risk integration approach at all, it is usually the top-down approach where copula functions are employed for linking the mar...
Published on Jan 1, 2010in Chinese Journal of Management Science
Cai Chen1
Estimated H-index: 1
The correlations among the credit,market and operational risk significantly influence the integrated risk.This paper proposes a model to integrate credit,market and operational risk considering correlation.The integrated risk is computed by Copula function and Monte Carlo simulation.The diversification benefit and the overall risk variation from different copulas are explored.At last,the empirical results base on an accepted literature data show,this proposed model can describe the risk correlat...
Published on Mar 1, 2007in Journal of Credit Risk 0.41
X. Burtschell2
Estimated H-index: 2
,
Jonathan Gregory3
Estimated H-index: 3
,
Jean-Paul Laurent20
Estimated H-index: 20
We consider "copula skew models" that account for the correlation smile in the pricing of synthetic CDO tranches. These can be viewed as stochastic or local correlation models and are extensions of the well-known one factor Gaussian copula model. We analyse these models through their conditional default probability distributions and marginal compound correlations. We also give some examples of using a particular stochastic correlation model to fit the market, illustrating the stability of the pa...
Published on Jan 1, 2007in Chinese Journal of Management Science
Li Jian-ping1
Estimated H-index: 1
(CAS: Chinese Academy of Sciences)
Most of the current studies in loan pricing field aim at credit risk and pay little attention to the influence of credit and market correlation risk.Research based on credit risk,credit and market correlation risk is now still a new industry.This paper studies this issue and proposes corresponding model.Some significant results are obtained in the paper: Two different item loans will get different interest rate from bank only because they are in different industry.It is argued that different ind...
Published on Mar 1, 2006
Andrew Kuritzkes4
Estimated H-index: 4
,
Til Schuermann25
Estimated H-index: 25
This paper seeks to put forward a framework, from the perspective of practitioners and policymakers, for how the known, unknown, and unknowable vary by risk type within banking. We define total bank risk in terms of earnings volatility, which can be broken down into five major classes of risk: market, credit, asset/liability, operational, and business risks. For our purposes, risk is known (K) if it can be enumerated, in the sense of being identified, and quantified; it is unknown (U1) if the se...
Published on Feb 1, 2006in Journal of Banking and Finance 2.21
Norbert J. Jobst6
Estimated H-index: 6
(Brunel University London),
Gautam Mitra27
Estimated H-index: 27
(Brunel University London),
Stavros A. Zenios39
Estimated H-index: 39
(UCY: University of Cyprus)
Abstract We introduce a modelling paradigm which integrates credit risk and market risk in describing the random dynamical behaviour of the underlying fixed income assets. We then consider an asset and liability management (ALM) problem and develop a multistage stochastic programming model which focuses on optimum risk decisions . These models exploit the dynamical multiperiod structure of credit risk and provide insight into the corrective recourse decisions whereby issues such as the timing ri...
Cited By6
Newest
Published on Oct 1, 2018in Energy Economics 4.15
Xi Zhang (Desautels Faculty of Management), Jian Li (BIT: Beijing Institute of Technology)
Abstract This paper concerns the risk analysis of six Chinese banks which are involved in carbon financing. Factor copula is introduced to simulate the corresponding carbon finance credit risk and market risk by latent variables in an indirect method. In short, the four common factors in carbon financing – exchange rates, interest rates, CER price, and Brent oil prices – are analyzed and explored in factor copula approach that incorporates KMV, GARCH models in two steps. The KMV and GARCH models...
Tarunika Jain Agrawal (DU: University of Delhi), Sanjay Sehgal11
Estimated H-index: 11
(DU: University of Delhi)
Banks are exposed to different types of risks in the process of financial intermediation and maturity transformation. The experience of the extant global financial crisis provided ample evidence of interaction among bank risks and perils of ignoring interactions in the changing economic, technological and regulatory environment. In this study, we assess the dynamic interaction among bank risks for the entire banking sector and bank groups based on various bank-specific characteristics in a vecto...
Hanène Mejdoub1
Estimated H-index: 1
(Tunis University),
Mounira Ben Arab1
Estimated H-index: 1
(College of Business Administration)
The purpose of this paper is to provide an extension to recent contributions in the field of quantitative risk management by modeling non-life insurance risks in a multivariate framework. This contribution examines the impact of explicit dependence modeling among non-life insurance losses on capital requirement. First, we focus on the modeling of dependence structure using copulas when the losses from the different business lines are dependent in some sense. Second, we concentrate on Value-at-Ri...
Published on Jan 1, 2015in Procedia Computer Science
Yanzhen Yao2
Estimated H-index: 2
(CAS: Chinese Academy of Sciences),
Xiaoqian Zhu7
Estimated H-index: 7
(CAS: Chinese Academy of Sciences)
+ 1 AuthorsJianping LiXiaolei19
Estimated H-index: 19
(CAS: Chinese Academy of Sciences)
After the recent global financial crisis, great focus has been raised on the identification of systemically important banks. Therefore, simple and intuitive indicators on banks’ systemic importance are urgently needed. This paper provides a new estimation method to measure and identify systemically important banks. We define quantitatively a systemic importance score (SIS) as the expected number of bank failures in the banking system given one particular bank fails. The SIS concentrates mainly o...
Experiences manifest the importance of comovement and communicable characters among the risks of financial assets. Therefore, the portfolio view considering dependence relationship among credit entities is at the heart of risk measurement. This paper introduces a mixed Poisson model assuming default probabilities of obligors depending on a set of common economic factors to construct the dependence structure of obligors. Further, we apply mixed Poisson model into an empirical study with data of f...
Published on Jan 1, 2014in Mathematical Problems in Engineering 1.18
Yibing Chen5
Estimated H-index: 5
,
Yong Shi39
Estimated H-index: 39
(UNO: University of Nebraska Omaha)
+ 1 AuthorsLingling Zhang9
Estimated H-index: 9
This paper serves as a response to the official assessment approach proposed by Basel Committee to identify domestic systemically important banks (D-SIBs) in China. Our analysis presents not only current levels of domestic systemic importance of individual banks but also the changes. We also consider the systemic risk of the whole banking system, by investigating how D-SIBs and non-D-SIBs are correlated before and after the recent financial crises using Copula. We find that the systemic importan...