RT Report
T1 Forward-looking asset correlations in the estimation of economic capital
A1 Chamizo Cana, Álvaro
A1 Fonollosa, Alexandre
A1 Novales Cinca, Alfonso Santiago
AB We analyze whether the credit market anticipated the financial crisis before the regulators using a methodology that combines the Merton model for the determination of economic capital with Vasicek’s factor model for asset correlation. Contrary to standard practice, we estimate the credit value at risk (VaR) and expected shortfall (ES) of a global loan portfolio using CDS spreads because credit derivat- ives incorporate forward-looking information on future systemic shocks that might be essential in the estimation of economic capital. We find that one-factor model can generally be a good representation of correlations in the credit market because of the high inter-sector correlations, although an appro- priately chosen second factor can provide additional information for risk estimation in stressed times. We show that there were, indeed, signs of stress in the credit market that were not incorporated in the determination of economic capital during the crisis and that some financial institutions did not con- sider properly. The overall impression is that it is not so much that risk models were over-simplified to anticipate the financial crisis but rather, that they were backward-looking. A potential implication of our research is that the level of regulatory capital should react to events in the credit market.
PB Fac. de Ciencias Económicas y Empresariales. Instituto Complutense de Análisis Económico (ICAE)
SN 2341-2356
YR 2019
FD 2019
LK https://hdl.handle.net/20.500.14352/17512
UL https://hdl.handle.net/20.500.14352/17512
LA eng
NO 5The authors acknowledge comments received from C. Matres Santos. Preprint submitted to Elsevier,	9th April 2019
NO Banco de España
DS Docta Complutense
RD 9 abr 2025