In this paper, using industry sector stock returns as proxies of firm asset values, we obtain bank capital requirements (through the cycle). This is achieved by Montecarlo simulation of a bank loan portfolio loss density. We depart from the Basel 2 analytical formula developed by Gordy (2003) for the computation of the economic capital by, first, allowing dynamic heterogeneity in the factor loadings, and, also, by accounting for stochastic dependent recoveries. Dynamic heterogeneity in the factor loadings is introduced by using dynamic forecast of a Dynamic Factor model fitted to a large dataset of macroeconomic credit drivers. The empirical findings show that there is a decrease in the degree of Portfolio Credit Risk, once we move from the Basel 2 analytic formula to the Dynamic Factor model specification.

Cipollini, A. e G., Missaglia. "Measuring bank capital requirements through dynamic factor analysis" Working paper, RECENT WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi – Università di Modena e Reggio Emilia, 2008.

Measuring bank capital requirements through dynamic factor analysis

Cipollini, A.;
2008-01-01

Abstract

In this paper, using industry sector stock returns as proxies of firm asset values, we obtain bank capital requirements (through the cycle). This is achieved by Montecarlo simulation of a bank loan portfolio loss density. We depart from the Basel 2 analytical formula developed by Gordy (2003) for the computation of the economic capital by, first, allowing dynamic heterogeneity in the factor loadings, and, also, by accounting for stochastic dependent recoveries. Dynamic heterogeneity in the factor loadings is introduced by using dynamic forecast of a Dynamic Factor model fitted to a large dataset of macroeconomic credit drivers. The empirical findings show that there is a decrease in the degree of Portfolio Credit Risk, once we move from the Basel 2 analytic formula to the Dynamic Factor model specification.
Febbraio
Cipollini, A.; Missaglia, G.
Cipollini, A. e G., Missaglia. "Measuring bank capital requirements through dynamic factor analysis" Working paper, RECENT WORKING PAPER SERIES, Dipartimento di Economia Marco Biagi – Università di Modena e Reggio Emilia, 2008.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/1292164
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