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Korean Housing Cycle: Implications for Risk Management (Factor-augmented VAR Approach)

Author

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  • Kwon, Hyuck-Shin
  • Bang, Doo Won
  • Kim, Myeong Hyeon

Abstract

This paper proposes an integrated risk-management framework that includes 1) measuring the risk of credit portfolios, 2) implementing a (macro) stress test, and 3) setting risk limits using the estimated systematic latent factor specific to capture the housing market cycle. To this end, we extract information from a set of real-estate market variables based on the FAVAR methodology proposed by Bernanke, Boivin and Eliasz (2005). Then, we show the method by which the estimated systematic factor is applied to risk management in the housing market in an integrated manner within the Vasicek one-factor credit model. The proposed methodology is well fitted to analyze the risk of slow-moving and low-defaultable forms of capital, such as alternative investments.

Suggested Citation

  • Kwon, Hyuck-Shin & Bang, Doo Won & Kim, Myeong Hyeon, 2017. "Korean Housing Cycle: Implications for Risk Management (Factor-augmented VAR Approach)," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 39(3), pages 43-62.
    • Handle: RePEc:zbw:kdijep:200811
    DOI: 10.23895/kdijep.2017.39.3.43
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    Cited by:

    1. Doo Won Bang & HyuckShin Kwon, 2022. "Policy Impact Analysis of Housing Policies Using Housing Cycles," SAGE Open, , vol. 12(3), pages 21582440221, July.

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    More about this item

    Keywords

    Housing Cycle; FAVAR; Risk Management;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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