Measuring business sector concentration by an infection model

Arbeitspapier

Results from portfolio models for credit risk tell us that loan concentration in certain industry sectors can substantially increase the value-at-risk (VaR). The purpose of this paper is to analyze whether a tractable "infection model" can provide a meaningful estimate of the impact of concentration risk on the VaR. I apply rather parsimonious data requirements, which are comparable to those for Moody's Binomial Expansion Technique (BET) and considerably lower than for a multi-factor model. The infection model extends the BET model by introducing default infection into the hypothetical portfolio on which the real portfolio is mapped in order to obtain a simple solution for the VaR. The infection probability is calibrated for a range of typical values of input parameters, which capture the concentration of a portfolio in industry sectors, default dependencies between exposures and their credit quality. The accuracy of the new model is measured for test portfolios with a realistic industry-sector composition, obtained from the German central credit register. I find that a carefully calibrated infection model provides a reasonably close approximation to the VaR obtained from a multi-factor model and outperforms by far the BET model. The simulation results suggest that the calibrated infection model promises to provide a fit-for-purpose tool to measure concentration risk in business sectors that could be useful for risk managers and banking supervisors alike.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Discussion Paper Series 2 ; No. 2006,03

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Single Equation Models; Single Variables: General ; Statistical Simulation Methods: General ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Thema: asset correlation ; concentration risk ; credit risk ; multi-factor model ; value-at-risk ; Kreditrisiko ; Wirtschaftskonzentration ; Value at Risk ; Kreditwürdigkeit ; Spillover-Effekt ; Schätzung ; Theorie ; Deutschland ; Kreditkonzentration

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Düllmann, Klaus
• Ereignis: Veröffentlichung
• (wer): Deutsche Bundesbank
• (wo): Frankfurt a. M.
• (wann): 2006

Weitere Informationen

• Handle: http://hdl.handle.net/10419/19751
• Letzte Aktualisierung: 10.03.2025, 11:43 MEZ