This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic and idiosyncratic risks and the nature of firm heterogeneity. The theoretical results obtained indicate that if firm-specific risk...

Identifying the relevant risk factors and their interdependence is central to understanding the risk exposures and vulnerabilities of a financial institution. It is needed for risk management, solvency assessment and stress testing. We assemble a unique dataset of risk factors relevant for...

Banks as financial intermediaries are broadly exposed to a wide range of economic and financial risk factors. We parse climate risk into its two main types: physical risk such as sea level rise and transition risk such as climate related policy changes (e.g., efficiency requirements or carbon...

Stress testing has become a tool of choice in banking for risk managers and regulators alike, and it is used more widely as a way to assess resilience to severely adverse events. Yet even the most creative risk manager would have been challenged to design a scenario that would have adequately...

The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive...

We develop a framework for modeling conditional loss distributions through the introduction of risk factor dynamics. Asset value changes of a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks. Default...