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Rethinking Economic Capital Management through the Integrated Derivative-based Treatment of Interest Rate and Credit Risk

2017-02-24Journal article Open access
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dc.contributor.authorGubareva, Mariya
dc.contributor.authorBorges, Maria Rosa
dc.date.accessioned2017-04-29T09:52:59Z
dc.date.available2017-04-29T09:52:59Z
dc.date.issued2017-02-24
dc.description.abstractThis research revisits the economic capital management regarding banking books of financial institutions exposed to the emerging market sovereign debt. We develop a derivative-based integrated approach to quantify economic capital requirements for considered jointly interest rate and credit risk. Our framework represents a major contribution to the empirical aspects of capital management. The proposed innovative modeling allows applying standard historic value-at-risk techniques developed for stand-alone risk factors to evaluate aggregate impacts of several risks. We use the time-series of credit default swap spreads and interest rate swap rates as proxy measures for credit risk and interest rate risk, respectively. An elasticity of interest rate risk and credit risk, considered a function of the business cycle phases, maturity of instruments, creditworthiness, and other macroeconomic parameters, is gauged by means of numerical modeling. Our contribution to the new economic thinking regarding the interest rate risk and credit rate risk management consists in their integrated treatment as the dynamics of interest rate and credit spreads is found to demonstrate the features of automatic stabilizers of each other. This research sheds light on how financial institutions may address hedge strategies against downside risks. It is of special importance for emerging markets heavily dependent on foreign capital as it potentially allows emerging market banks to improve risk management practices in terms of capital adequacy and Basel III rules. From the regulatory perspective, by taking into account inter-risk diversification effects it allows enhancing financial stability through jointly optimizing Pillar 1 and Pillar 2 economic capital.pt_PT
dc.description.versioninfo:eu-repo/semantics/publishedVersionpt_PT
dc.identifier.doi10.1007/s10479-017-2438-ypt_PT
dc.identifier.issn1572-9338
dc.identifier.urihttp://hdl.handle.net/10400.21/6962
dc.language.isoengpt_PT
dc.peerreviewedyespt_PT
dc.publisherSpringer Science+Business Mediapt_PT
dc.relation.publisherversionhttp://link.springer.com/article/10.1007%2Fs10479-017-2438-ypt_PT
dc.subjectEmerging marketspt_PT
dc.subjectIntegrated risk modelingpt_PT
dc.subjectInterest rate riskpt_PT
dc.subjectCredit riskpt_PT
dc.subjectDownside risk managementpt_PT
dc.subjectEconomic capitalpt_PT
dc.titleRethinking Economic Capital Management through the Integrated Derivative-based Treatment of Interest Rate and Credit Riskpt_PT
dc.typejournal article
dspace.entity.typePublication
oaire.citation.conferencePlaceNew Yorkpt_PT
oaire.citation.titleAnnals of Operations Researchpt_PT
person.familyNameGubareva
person.familyNameBorges
person.givenNameMariya
person.givenNameMaria Rosa
person.identifier.ciencia-id311F-E7AA-AAAA
person.identifier.ciencia-idF916-94DC-E0BC
person.identifier.orcid0000-0001-6829-7021
person.identifier.orcid0000-0001-5340-471X
person.identifier.ridY-8520-2018
person.identifier.ridC-7946-2009
person.identifier.scopus-author-id56850438400
person.identifier.scopus-author-id8581988500
rcaap.rightsopenAccesspt_PT
rcaap.typearticlept_PT
relation.isAuthorOfPublicationd6c8e85f-b262-4905-9380-4469f62011ed
relation.isAuthorOfPublicationa6bb0845-89fc-43a6-97d3-87ed5fcd10de
relation.isAuthorOfPublication.latestForDiscoverya6bb0845-89fc-43a6-97d3-87ed5fcd10de

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