@article {Kuo48, author = {Cheng-Kun Kuo and Chih-Wei Lee}, title = {Integrating Market and Credit Risk Using a Simplified Frailty Default Correlation Structure}, volume = {17}, number = {1}, pages = {48--58}, year = {2007}, doi = {10.3905/jfi.2007.688965}, publisher = {Institutional Investor Journals Umbrella}, abstract = {This article adopts a simplified approach to assess the correlation structure of credit risk. The approach could significantly reduce the numbers of estimated parameters in credit risk measurement. Thus it provides a simple way to integrate market risk smoothly that leads to a unified framework for computing fixed-income portfolio Value at Risk (VaR). Furthermore, based on recent research findings that frailty factors could induce a large estimated increase in default clustering, we also consider frailty variables in our integrated model. Using a portfolio as illustration, it is shown that the traditional approach where the correlation of market and credit risk is not considered, or frailty is not accounted for, may under-estimate VaR.TOPICS: Fixed income and structured finance, VAR and use of alternative risk measures of trading risk, credit risk management}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/17/1/48}, eprint = {https://jfi.pm-research.com/content/17/1/48.full.pdf}, journal = {The Journal of Fixed Income} }