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...

Regulatory capital for trading book positions includes two components that cover different risks but apply to the same portfolio, one for market risk and one for credit risk. Similar approaches are common in banks’ internal models for economic capital. Although it is known that joint market...

We present a stochastic simulation forecasting model for stress testing that is aimed at assessing banks’ capital adequacy, financial fragility, and probability of default. The paper provides a theoretical presentation of the methodology and the essential features of the forecasting model on...

Operational risk management and measurement has been paid an increasing attention in last years. The main two reasons are the Basel II requirements that were to be complied with by all international active financial institutions by the end of 2006 and recent severe operational risk loss events....

We develop a general approach for stress testing correlations of financial asset portfolios. The correlation matrix of asset returns is specified in a parametric form, where correlations are represented as a function of risk factors, such as country and industry factors. A sparse factor...

Gradient capital allocation, also known as Euler allocation, is a technique used to redistribute diversified capital requirements among different segments of a portfolio. The method is commonly employed to identify dominant risks, assessing the risk-adjusted profitability of segments, and...

In response to a growing awareness of the potential impact of climate change on financial stability, academics, financial institutions (FIs), central banks and supervisors (CB&S) have developed a suite of scenarios and analytical tools to assess forward-looking climate-related financial risks,...

Forecasts, models and stress tests are important tools for policymakers and business planners. Recent developments in these related spheres have seen greater emphasis placed on stress tests from a regulatory perspective, while at the same time forecasting performance has been criticized. Given...

We investigate default probabilities and default correlations of Merton-type credit portfolio models in stress scenarios where a common risk factor is truncated. The analysis is performed in the class of elliptical distributions, a family of light-tailed to heavy-tailed distributions...

Risk is an inherent feature of agricultural production and marketing and accurate measurement of it helps inform more efficient use of resources. This paper examines three tail quantile-based risk measures applied to the estimation of extreme agricultural financial risk for corn and soybean...