Credit Portfolios: What Defines Risk Horizons and Risk Measurement?*

19 Pages Posted: 2 Nov 2005 Last revised: 5 Jan 2010

Date Written: August 17, 2006

Abstract

The strong autocorrelation between economic cycles demands that we analyze credit portfolio risk in a multiperiod setup. We embed a standard one-factor model in such a setup. We discuss the calibration of the model to Standard & Poor's ratings data in detail. But because single-period risk measures cannot capture the cumulative effects of systematic shocks over several periods, we define an alternative risk measure, which we call the time-conditional expected shortfall(TES), to quantify credit portfolio risk over a multiperiod horizon.

Keywords: Credit risk management, portfolio management, risk measurement, coherence, VaR, expected shortfall, factor model

JEL Classification: C22, C51, E22, G18, G21, G33

Suggested Citation

Ebnöther, Silvan and Vanini, Paolo, Credit Portfolios: What Defines Risk Horizons and Risk Measurement?* (August 17, 2006). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=831725 or http://dx.doi.org/10.2139/ssrn.831725

Silvan Ebnöther

Zurich Cantonal Bank ( email )

Josefstrasse 222
CH-8000 Zurich
Switzerland

Paolo Vanini (Contact Author)

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland