The modelling of bank risk
Credit risk in extreme economic circumstances has been evaluated using metrics based on Value-at-Risk (VaR), Conditional-Value-at-Risk (CVaR), Probability of Default (PD) and Conditional Probability of Default (CPD). Applications of the Merton model and models used by Credit Metrics have been utilized to measure bank distance to default and probability of default in the context of the global financial crisis.
Research questions:
- Are extreme credit measures better predictors of risk than tradiitional measures?
- How does extreme credit risk differ among models, countries and industries?
- Can capital adequacy be better measured using extreme risk measures?
Research methods:
VaR, CVaR, Merton-KMV structural modelling, transition matrices and quantile regressions are methods used in this project.