Jointly modeling market and credit risks for analyzing asset portfolio dynamics are both important. Throughout this session, the presenters will show portfolio risk-decomposition, risk contribution and economic capital using a risk-integrated model accounting for market and granular credit dynamics. Attendees will learn how different the interaction between market and credit risks can be across credit-risky assets and sub-portfolios with different characteristics (maturity, rating, R-squared, etc.).
These differences in joint market-credit effects highlight the value of a risk-integrated analysis and cast doubt on commonly used simple adjustments, such as copulas, to integrate results from separate market and credit systems. During this session, the presenters will show that these simple adjustments will likely make some assets seem overly attractive, leading to poor investment decisions. Finally, they will demonstrate the importance of granular credit modeling in evaluating the efficacy of liability-aware investment strategies (e.g., cashflow matching for annuity runoff).
At the conclusion of the session, attendees will be able to:
• Appreciate the importance of jointly modeling granular credit and market risks
• Evaluate different approaches to risk integration and better understand the limitations of simple approaches such as copulas
• Design improved liability-aware investment strategies accounting for credit portfolio dynamics
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