Credit Risk in General Equilibrium

37 Pages Posted: 10 Jul 2012

See all articles by Jürgen Eichberger

Jürgen Eichberger

Heidelberg University - Alfred Weber Institute for Economics

Klaus Rheinberger

University of Applied Sciences Vorarlberg

Martin Summer

Oesterreichische Nationalbank (OeNB)

Multiple version iconThere are 2 versions of this paper

Date Written: June 11, 2012

Abstract

Credit risk models used in quantitative risk management treat credit risk analysis conceptually like a single person decision problem. From this perspective an exogenous source of risk drives the fundamental parameters of credit risk: probability of default, exposure at default and the recovery rate. In reality these parameters are the result of the interaction of many market participants: They are endogenous. We develop a general equilibrium model with endogenous credit risk that can be viewed as an extension of the capital asset pricing model. We analyze equilibrium prices of securities as well as equilibrium allocations in the presence of credit risk. We use the model to discuss the conceptual underpinnings of the approach to risk weight calibration for credit risk taken by the Basel Committee.

Keywords: Credit risk, endogenous risk, systemic risk, banking regulation

JEL Classification: G32, G33, G01, D52

Suggested Citation

Eichberger, Jürgen and Rheinberger, Klaus and Summer, Martin, Credit Risk in General Equilibrium (June 11, 2012). ECB Working Paper No. 1445. Available at SSRN: https://ssrn.com/abstract=2081663

Jürgen Eichberger (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Heidelberg, D-69117
Germany

Klaus Rheinberger

University of Applied Sciences Vorarlberg ( email )

Hochschulstr. 1
Dornbirn, A-6850
Austria

Martin Summer

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

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