Impact of credit spread fluctuations on portfolio value

Authors

  • Agil Kerimov Azerbaijan University Author

Keywords:

Monte Carlo simulation, credit spread risk, interest rate risk, double counting

Abstract

Banks criticize Basel accords for potential double counting of the same risks in calculation methods of minimum required capital. These risks should be isolated from each other for accurate measurement of regulatory capital. The purpose of this paper is to isolate credit spread risk from interest rate risk and analyze the impact of pure credit spread fluctuations on portfolio value. Different scenarios are simulated by using Monte Carlo simulation method. The model is built in Excel and Visual Basic for Applications. The results show that coupon rates and credit spread deviations have an impact on the average and the standard deviation of portfolio value which makes them among the majors factors in assigning bond weights. Besides, the interest rate component that reduces the fluctuations in standard deviation should also be taken into consideration in assigning the weights

Author Biography

  • Agil Kerimov, Azerbaijan University

    Ph.D. student

References

[1]. Basel Committee on Banking Supervision (2005) An Explanatory Note on the Basel II IRB Risk Weight Functions, Basel: Bank for International Settlements.

[2]. Gregory, J. (2012) Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd ed., West Sussex: John Wiley & Sons.

[3]. Letizia, A. (2007) Credit Spread Widening Risk in Portfolios: Pricing Techniques and Sensitivity Measures.

[4]. Letizia, A. (2010) Vulnerability of Risk Management Systems in Credit Spread Widening Scenarios, The IUP Journal of Financial Risk Management, 7(3), pp. 7-24.

Title_May_2024

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Published

2024-05-20

Issue

Vol. 3 No. 2 (2024)

Section

Articles

License

Copyright (c) 2024 Agil Kerimov (Author)

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This work is licensed under a Creative Commons Attribution 4.0 International License.

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