SHERP

Value At Risk and Credit Risk

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Authors
Cho, Jiho; Baik, Bokhyeon
Issue Date
2000
Publisher
College of Business Administration (경영대학)
Citation
Seoul Journal of Business Vol6(1): 33~53(2000)
Keywords
VAR; credit rating; default risk
Abstract
In recent years increased volatility in interest rates, exchange rates,
and other macroeconomic variables has led us to put greater emphasis
on risk management. VAR (Value at Risk) has become a common tool to
measure an entity's exposure to market risk. But there are few studies
to link VAR with credit risk. This study examines the association
between the two with three financial statement-based estimates of
VARs. Moreover, we investigate whether the term spread and the default
spread affect the VAR metrics.
Results indicate that the VAR for speculative grade ratings is
significantly higher than that for investment grade ratings. After
controlling for the 2-score variables, which have been extensively used
amongst credit analysts, we provide strong evidence that the VAR
metrics are correlated with the credit ratings. Moreover, the findings
suggest that the magnitude of the cash statement VAR is positively
related to the term spread and the default spread. However, we could
not find evidence that the balance sheet VAR and income statement
VAR are affected by the term spread and the default spread.
ISSN
1226-9816
Language
English
URI
http://hdl.handle.net/10371/1748
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 06, Number 1/2 (2000)
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