Publication

Predicting the stressed expected loss of large US banks

Eric Jondeau, Amir Hossein Khalilzadeh Naghneh
2022
Journal Articles

Abstract

We develop a methodology to measure the expected loss of commercial banks in a market downturn, which we call stressed expected loss (SEL). We simulate a market downturn as a negative shock on interest rate and credit market risk factors that reflect the banks' market-sensitive assets. We measure SEL as the difference between the mark-to-market value of the assets in the downturn and the book value of the liabilities. Based on large U.S. commercial banks, we empirically demonstrate that individual SEL predicts the loss of capital projected by banks in a severely adverse scenario and that aggregate SEL predicts macroeconomic variables. (c) 2021 Elsevier B.V. All rights reserved.

Official source

https://infoscience.epfl.ch/entities/publication/60ae45d8-4c8f-4a7e-a7f6-3fbc909030da

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Eric Jondeau, Amir Hossein Khalilzadeh Naghneh
2022
Journal Articles

Abstract

Official source

https://infoscience.epfl.ch/entities/publication/60ae45d8-4c8f-4a7e-a7f6-3fbc909030da

About this result

Related concepts (32)

Loss function

In mathematical optimization and decision theory, a loss function or cost function (sometimes also called an error function) is a function that maps an event or values of one or more variables onto a real number intuitively representing some "cost" associated with the event. An optimization problem seeks to minimize a loss function. An objective function is either a loss function or its opposite (in specific domains, variously called a reward function, a profit function, a utility function, a fitness function, etc.

Credit risk

Credit risk is the possibility of losing a lender holds due to a risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs.

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An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed. The annual interest rate is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are usually annualized.

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