RT Journal Article
SR Electronic
T1 Integrating Market and Credit Risk Using a Simplified Frailty Default Correlation Structure
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 48
OP 58
DO 10.3905/jfi.2007.688965
VO 17
IS 1
A1 Cheng-Kun Kuo
A1 Chih-Wei Lee
YR 2007
UL https://pm-research.com/content/17/1/48.abstract
AB 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