Interaction of market and credit risk: an analysis of inter-risk correlation and risk aggregation

Arbeitspapier

In this paper we investigate the interaction between a credit portfolio and another risk type, which can be thought of as market risk. Combining Merton-like factor models for credit risk with linear factor models for market risk, we analytically calculate their interrisk correlation and show how inter-risk correlation bounds can be derived. Moreover, we elaborate how our model naturally leads to a Gaussian copula approach for describing dependence between both risk types. In particular, we suggest estimators for the correlation parameter of the Gaussian copula that can be used for general credit portfolios. Finally, we use our findings to calculate aggregated risk capital of a sample portfolio both by numerical and analytical techniques.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series 2 ; No. 2008,11

Classification and Topics

• Classification: Wirtschaft ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Financial Institutions and Services: Government Policy and Regulation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Estimation: General
• Subject: Risk aggregation ; Inter-risk correlation ; economic capital ; ICAAP ; diversification ; Risiko ; Kreditrisiko ; Korrelation ; Portfolio-Management ; Eigenkapitalvorschriften ; Theorie ; Theorie ; EU-Staaten

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hillebrand, Martin ; Böcker, Klaus
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/19788
• Last update: 10.03.2025, 11:43 AM CET