+7 925 966 4690, 9am6pm (GMT+3), Monday – Friday
ИД «Финансы и кредит»

JOURNALS

  

FOR AUTHORS

  

SUBSCRIBE

    
Digest Finance
 

Hierarchical Copulae in Credit Risk Modeling

Vol. 22, Iss. 3, SEPTEMBER 2017

PDF  Article PDF Version

Received: 28 April 2017

Received in revised form: 15 May 2017

Accepted: 9 June 2017

Available online: 21 September 2017

Subject Heading: RISK, ANALYSIS AND EVALUATION

JEL Classification: С58, G17

Pages: 310-320

https://doi.org/10.24891/df.22.3.310

Kazakova K.A. Astrakhan State University, Astrakhan, Russian Federation
kristinakazakova0309@gmail.com

Knyazev A.G. Astrakhan State University, Astrakhan, Russian Federation
agkniazev@mail.ru

Lepekhin O.A. Astrakhan State University, Astrakhan, Russian Federation
okmb07@yandex.ru

Importance This research outlines an economic and mathematical model of the overdue loan debt. The model is based on copula functions allowing to simulate a non-Gaussian distribution of financial risks and credit risk, in particular.
Objectives The research models a joint distribution of overdue debt series in order to forecast the credit risk exposure. Relying upon the forecast, we intend to evaluate the efficiency of methods used to make provisions for possible losses and subsequently determine a reasonable approach to accruing the provision.
Methods We examine whether hierarchical copula models can be applied to build the joint distribution of overdue loan debt series in relation to banking institutions. It is considered as the basis for making further estimates of the overdue loan debt.
Results We build and evaluate a multivariate copula model of overdue loan debt with the hierarchical structure. Based on the modeled multivariate correlation, we forecast indicators of the overdue loan debt, which could be used as estimated provisions for credit losses. The estimated provisions turn to be sufficient for covering the real amount of overdue debt, being, in most cases, much less than that indicated in Regulation of the Central Bank of the Russian Federation № 254-П, On Rates of Provisions for Loan Losses.
Conclusions and Relevance The multivariate copula model of the overdue loan debt can underlie effective risk management systems in credit institutions.

Keywords: bank reserve, credit risk, overdue loan debt, copula-based model, forecast

References:

  1. Bologov Ya.V. Otsenka riska kreditnogo portfelya s ispol'zovaniem kopula-funktsii [Assessing the risk exposure of the credit portfolio using the copula function]. Moscow, Sinergiya Press Publ., 2013, 22 p.
  2. Fantazzini D. [Credit risk management]. Prikladnaya ekonometrika = Applied Econometrics, 2008, vol. 12, iss. 4, pp. 84–137. (In Russ.)
  3. Fantazzini D. [An econometric analysis of financial data in risk management]. Prikladnaya ekonometrika = Applied Econometrics, 2008, vol. 10, iss. 2, pp. 105–138. (In Russ.)
  4. Fantazzini D. [Modeling of multidimensional probability distributions with copula functions]. Prikladnaya ekonometrika = Applied Econometrics, 2011, vol. 2, iss. 2, pp. 98–134. (In Russ.)
  5. Nelsen R.B. An Introduction to Copulas. New York, Springer, 2006, 269 p.
  6. Aas K., Czado C., Frigessi A., Bakken H. Pair-Copula Constructions of Multiple Dependence. Insurance: Mathematics and Economics, 2009, vol. 44, iss. 2, pp. 182–198. URL: Link
  7. Czado C., Brechmann E.C., Gruber L. Selection of Vine Copulas. In: Copulae in Mathematical and Quantitative Finance. Springer-Verlag Berlin Heidelberg, 2013.
  8. Travkin A.I. [Designing paired-copula constructs on the basis of empirical tails of copula: Evidence from the Russian market of shares]. XV Aprel'skaya mezhdunarodnaya nauchnaya konferentsiya po problemam razvitiya ekonomiki i obshchestva: materialy konferentsii [Proc. Sci. Conf. The 15th April International Scientific Conference on Development Issues of the Economy and Society]. Moscow, NRU HSE Publ., 2015, vol. 1, pp. 387–400.
  9. Hering C., Hofert M., Mai J.-F., Scherer M. Constructing Nested Archimedean Copulas with Lévy Subordinators. Journal of Multivariate Analysis, 2010, vol. 101, iss. 6, pp. 1428–1433. URL: Link
  10. Hofert M., Scherer M. CDO Pricing with Nested Archimedean Copulas. Quantitative Finance, 2011, vol. 11, iss. 5, pp. 775–787.URL: Link
  11. Hofert M., Mächler M., McNeil A.J. Archimedean Copulas in High Dimensions: Estimators and Numerical Challenges Motivated by Financial Applications. Journal de la Société Française de Statistique, 2013, vol. 154, iss. 1, pp. 25–63.
  12. Hansen B.E. Autoregressive Conditional Density Estimation. International Economic Review, 1994, vol. 35, iss. 3, pp. 705–730.
  13. Bolstad W.M. Introduction to Bayesian Statistics: Second Edition. John Wiley & Sons, 2007, 464 p.

View all articles of issue

 

ISSN 2311-9438 (Online)
ISSN 2073-8005 (Print)

Journal current issue

Vol. 28, Iss. 4
December 2023

Archive