Business Cycle Effects on Portfolio Credit Risk: Scenario Generation Through Dynamic Factor Analysis

22 Pages Posted: 15 Feb 2005

See all articles by Andrea Cipollini

Andrea Cipollini

University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Giuseppe Missaglia

Iccrea Banca

Date Written: February 2005

Abstract

In this paper, we focus on measuring the risk associated to a bank loan portfolio. In particular, we depart from the standard one factor model representation of portfolio credit risk. In particular, we consider an hetrogeneous portfolio, and we account for stochastic dependent recoveries. We also examine the influence of either one systemic shock (interpreted as the state of the business cycle) or two systemic shocks (interpreted as demand and supply innovations) on portfolio credit risk. The identification and estimation of the common shocks is obtained by fitting a Dynamic Factor model to a large number of macro credit drivers. The scenarios are obtained by employing Montecarlo stochastic simulation.

Keywords: Risk management, default correlation, Dynamic Factor

JEL Classification: C32, E17, G20

Suggested Citation

Cipollini, Andrea and Missaglia, Giuseppe, Business Cycle Effects on Portfolio Credit Risk: Scenario Generation Through Dynamic Factor Analysis (February 2005). Available at SSRN: https://ssrn.com/abstract=665724 or http://dx.doi.org/10.2139/ssrn.665724

Andrea Cipollini (Contact Author)

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

Giuseppe Missaglia

Iccrea Banca ( email )

Roma
Italy

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