Skip to main content
Mobile
  • Finance, Accounting & Economics
  • Global Business Management
  • Management, Leadership & Organisation
  • Marketing & Sales
  • Strategy
  • Technology & Operations
HS Talks HS Talks
Subjects  
Search
  • Notifications
    Notifications

    No current notifications.

  • User
    Welcome Guest
    You have Limited Access The Business & Management Collection
    Login
    Get Assistance
    Login
    Forgot your password?
    Login via your organisation
    Login via Organisation
    Get Assistance
Finance, Accounting & Economics
Global Business Management
Management, Leadership & Organisation
Marketing & Sales
Strategy
Technology & Operations
Practice paper

General wrong-way risk and stress calibration of exposure

Michael Pykhtin
Journal of Risk Management in Financial Institutions, 5 (3), 234-251 (2012)
https://doi.org/10.69554/CBFI5371

Abstract

A conceptually sound method of incorporating general wrong-way risk (WWR) into the asymptotic single risk factor (ASRF) framework that underlies Basel capital rules is shown in the first part of this paper. An algorithm is presented that converts the unconditional distribution of netting-set-level exposure generated by an arbitrary Monte Carlo simulation process to an exposure at default (EAD) measure that consistently incorporates general WWR under the ASRF framework. The conversion is done at a counterparty level via a simple closed-form function of a single parameter that controls the strength of general WWR. The second part of the paper analyses the Basel III requirement that, in addition to normal calibration, banks’ credit exposure models must be calibrated to a period of stress. Basel III justified the introduction of stress calibration by the need for capturing general WWR. However, it is argued that stress calibration of exposure does not address general WWR adequately. Simple examples are used to show that EADs obtained with stress calibration for a benign period will severely overstate not only the EAD seen in that benign period, but also the EAD seen in the stressed period.

Keywords: counterparty credit risk; wrong-way risk; economic capital; Basel III

The full article is available to subscribers to the journal.

Already a subscriber? Login or review other options.

Citation

Pykhtin, Michael (2012, June 1). General wrong-way risk and stress calibration of exposure. In the Journal of Risk Management in Financial Institutions, Volume 5, Issue 3. https://doi.org/10.69554/CBFI5371.

Options

  • Download PDF
  • Share this page
    Share This Article
    Messaging
    • Outlook
    • Gmail
    • Yahoo!
    • WhatsApp
    Social
    • Facebook
    • X
    • LinkedIn
    • VKontakte
    Permalink
cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 5 / Issue 3
© Henry Stewart
Publications LLP

The Business & Management Collection

  • ISSN: 2059-7177
  • Contact Us
  • Request Free Trial
  • Recommend to Your Librarian
  • Subscription Information
  • Match Content
  • Share This Collection
  • Embed Options
  • View Quick Start Guide
  • Accessibility

Categories

  • Finance, Accounting & Economics
  • Global Business Management
  • Management, Leadership & Organisation
  • Marketing & Sales
  • Strategy
  • Technology & Operations

Librarian Information

  • General Information
  • MARC Records
  • Discovery Services
  • Onsite & Offsite Access
  • Federated (Shibboleth) Access
  • Usage Statistics
  • Promotional Materials
  • Testimonials

About Us

  • About HSTalks
  • Editors
  • Contact Information
  • About the Journals

HSTalks Home

Follow Us On:

HS Talks
  • Site Requirements
  • Copyright & Permissions
  • Terms
  • Privacy
  • Sitemap
© Copyright Henry Stewart Talks Ltd

Personal Account Required

To use this function, you need to be signed in with a personal account.

If you already have a personal account, please login here.

Otherwise you may sign up now for a personal account.

HS Talks

Cookies and Privacy

We use cookies, and similar tools, to improve the way this site functions, to track browsing patterns and enable marketing. For more information read our cookie policy and privacy policy.

Cookie Settings

How Cookies Are Used

Cookies are of the following types:

  • Essential to make the site function.
  • Used to analyse and improve visitor experience.

For more information see our Cookie Policy.

Some types of cookies can be disabled by you but doing so may adversely affect functionality. Please see below:

(always on)

If you block these cookies or set alerts in your browser parts of the website will not work.

Cookies that provide enhanced functionality and personalisation. If not allowed functionality may be impaired.

Cookies that count and track visits and on website activity enabling us to organise the website to optimise the experience of users. They may be blocked without immediate adverse effect.