Value At Risk and Credit Risk

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Cho, Jiho; Baik, Bokhyeon
Issue Date
College of Business Administration (경영대학)
Seoul Journal of Business Vol6(1): 33~53(2000)
VARcredit ratingdefault risk
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.
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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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