In this contribution the authors propose a contagion model for bank loan portfolios that takes into account
both a macroeconomic component and a firm-specific microeconomic component due to the counterparty
risk. The macroeconomic effect is assumed dependent on a few economic factors while the microeconomic
mechanism of propagation is due to the business relations, explicitly modeled through the client network.
A wide Monte Carlo simulation analysis is carried out in order to study the main features of the model.
In this contribution we tackle the problem of the measurement of the credit risk for a
portfolio of bank loans. In particular, we propose a contagion model for bank loan
portfolios that takes into account both a macroeconomic component and a firm-specific
microeconomic component due to the counterparty risk.
A major issue in the assessment of the credit risk of a large portfolio of financial
positions, as is the case for bank loan portfolios, is the problem of the correct measurement
of the dependence among defaults and among credit migrations. Such an aspect has
important implication(s) for the risk management of portfolios, since the dependence
among defaults has to be explicitly modeled.
Some recent contributions in the literature on the modeling of the dependence among
defaults try to model the counterparty risk, which may have the effect of introducing a
contagion mechanism in the propagations of defaults. Some of these contributions
propose models that can be particularly useful in the analysis of the loss distribution for
a portfolio of bank loans.The notion of counterparty risk has been introduced by Jarrow and Yu (2001) and
afterwards has been considered both in reduced form models (see Giesecke, 2003, Frey and
Backhaus, 2004) and in structural models (see Kern and Rudolph, 2001, Egloff, Leippold and
Vanini, 2004, Giesecke, 2004, Neu and Khun, 2004). Moreover, the counterparty risk may be
taken into consideration in binomial-type models for the credit risk of portfolios of financial
positions, as has been made by Davis and Lo (2001) and Giesecke and Weber (2004).
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