IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/27222.html
   My bibliography  Save this paper

Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model

Author

Listed:
  • Sokolov, Yuri

Abstract

The recent economic crisis on the demand side of the economy affects the trends and volatilities of the exchange rates as well as the operating conditions of borrowers in emerging market economies. But the exchange rate depreciation creates both winners and losers. With a weaker exchange rate, exporters and net holders of foreign assets will benefit, and vice verse, those relying on import and net debtors in foreign currency will be hurt. This paper presents a simple FX adjustment framework within Factor Endogenous Behaviour Aggregation (FEBA) approach* based on the decomposition of the competitiveness factor into components with meaningful behaviour content and subsequent collapsing into the Adjustment Index. The setup, while being simple, nicely captures non-linear and non-symmetric nature of the FX risk impact on bank’s credit portfolio and could be very useful for modeling credit risk. *The approach was set up in “Interaction between market and credit risk: Focus on the endogeneity of aggregate risk” and mentioned in Roubini Global Economic Digest as “Advance in Credit Risk Management”.

Suggested Citation

  • Sokolov, Yuri, 2010. "Business cycle effects on portfolio credit risk: A simple FX Adjustment for a factor model," MPRA Paper 27222, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27222
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/27222/1/MPRA_paper_27222.pdf
    File Function: original version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/27321/1/MPRA_paper_27321.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sokolov, Yuri, 2009. "Interaction between market and credit risk: Focus on the endogeneity of aggregate risk," MPRA Paper 18245, University Library of Munich, Germany.
    2. Jose Giancarlo Gasha & Mr. Andre O Santos & Mr. Jorge A Chan-Lau & Mr. Carlos I. Medeiros & Mr. Marcos R Souto & Christian Capuano, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 2009/162, International Monetary Fund.
    3. Thorvaldur Gylfason, 2002. "The Real Exchange Rate Always Floats," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 369-381, December.
    4. Frederic S. Mishkin, 1999. "Global Financial Instability: Framework, Events, Issues," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 3-20, Fall.
    5. Cornaglia, Anna & Morone, Marco, 2009. "Rating philosophy and dynamic properties of internal rating systems: A general framework and an application to backtesting," MPRA Paper 14711, University Library of Munich, Germany.
    6. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sokolov, Yuri, 2012. "Modeling risk in a dynamically changing world: from association to causation," MPRA Paper 40096, University Library of Munich, Germany.
    2. Sokolov, Yuri I., 2024. "Bridging the Risk Management Gap: Adopting the Factor Endogenous Behaviour Aggregation (FEBA) Approach Beyond Banking," MPRA Paper 121188, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "A corporate balance-sheet approach to currency crises," Journal of Economic Theory, Elsevier, vol. 119(1), pages 6-30, November.
    2. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
    3. Kharroubi, E., 2006. "Illiquidity, Financial Development and the Growth-Volatility Relationship Illiquidity, Financial Development and the Growth-Volatility Relationship," Working papers 139, Banque de France.
    4. -, 2002. "Growth with stability: financing for development in the new international context," Libros de la CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 2319 edited by Eclac, May.
    5. Young Lee & Changyong Rhee & Taeyoon Sung, 2006. "Fiscal policy in Korea: Before and after the financial crisis," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(4), pages 509-531, August.
    6. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, vol. 87(2), pages 216-231.
    7. Gimet, Celine, 2007. "Conditions necessary for the sustainability of an emerging area: The importance of banking and financial regional criteria," Journal of Multinational Financial Management, Elsevier, vol. 17(4), pages 317-335, October.
    8. Baah Aye Kusi & Lydia Adzobu & Alex Kwame Abasi & Kwadjo Ansah-Adu, 2020. "Sectoral Loan Portfolio Concentration and Bank Stability: Evidence from an Emerging Economy," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 19(1), pages 66-99, April.
    9. Bleakley, Hoyt & Cowan, Kevin, 2010. "Maturity mismatch and financial crises: Evidence from emerging market corporations," Journal of Development Economics, Elsevier, vol. 93(2), pages 189-205, November.
    10. Kremen Viktoriia & Shkolnyk Inna & Semenog Andrii & Kremen Olha, 2019. "Evaluating the Relationship Between Financial Sustainability and Socio-Economic Development of Countries," Central European Economic Journal, Sciendo, vol. 6(53), pages 25-38, January.
    11. Claus Holm & Morten Balling & Thomas Poulsen, 2014. "Corporate governance ratings as a means to reduce asymmetric information," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-16, December.
    12. Steinherr, Alfred & Cisotta, Alessandro & Klar, Erik & Sehovic, Kenan, 2006. "Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia," Working Papers on Regional Economic Integration 6, Asian Development Bank.
    13. Fabrizio Coricelli & Mathilde Maurel, 2011. "Growth and Crisis in Transition: A Comparative Perspective," Review of International Economics, Wiley Blackwell, vol. 19(1), pages 49-64, February.
    14. Enisse Kharroubi, 2004. "Macroeconomic Volatility and endogenous debt maturity choice," Money Macro and Finance (MMF) Research Group Conference 2004 22, Money Macro and Finance Research Group.
    15. Henry, Peter B. & Lorentzen, Peter Lombard, 2003. "Domestic Capital Market Reform and Access to Global Finance: Making Markets Work," Research Papers 1820, Stanford University, Graduate School of Business.
    16. U. Michael Bergman & Shakill Hassan, 2008. "Currency Crises and Monetary Policy in an Economy with Credit Constraints: The No Interest Parity Case," EPRU Working Paper Series 08-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    17. Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Center for Development Economics 2008-09, Department of Economics, Williams College.
    18. Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    19. Shinji Takagi, 2010. "Applying the Lessons of Asia: The IMF’s Crisis Management Strategy in 2008," Working Papers id:3006, eSocialSciences.
    20. Mardi Dungey & Rene Fry & Vance L. Martin, 2006. "Correlation, Contagion, and Asian Evidence," Asian Economic Papers, MIT Press, vol. 5(2), pages 32-72, Spring/Su.

    More about this item

    Keywords

    exchange rate; factor modeling; competitiveness; credit risk; market risk;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • A10 - General Economics and Teaching - - General Economics - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:27222. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.