Designing a model to explain the contagion effect of risk in the credit portfolio of a bank with a dynamic conditional correlation approach

Subject Areas : Management

Gholamreza talebian ¹ , mohsen seighali ² , Mir Feiz Falah ³

1 - PhD Student, Department of Financial Management, Qazvin Branch, Islamic Azad University, Qazvin, Iran
2 - Assistant Professor, Department of Financial Management, Qazvin Branch, Islamic Azad University, Qazvin, Iran
3 - Assistant Professor, Department of Finance, Central Tehran Branch, Islamic Azad University, Tehran, Iran

Received: 2024-01-15 Accepted : 2024-09-19 Published : 2024-09-22

Keywords: Risk Contagion, Credit Portfolio, Dynamic Conditional Correlation, Bank.,

Abstract :

This article introduces a designed model to elucidate the contagion effect of risk in the credit portfolio of a bank. The dynamic conditional correlation approach has been applied on a daily basis within the time span from March 26, 2011, to September 2, 2021, to model the dynamic patterns of changes in correlation among various types of risks. Initially, the risk for each contract is determined using the optimized ARMA-GARCH model. Subsequently, Conditional Value at Risk (CVaR) is extracted as the risk factor for each contract. The obtained risk values are further modeled using the multivariate BEKK and DCC-GARCH models to analyze the contagion levels based on their results and address the research hypotheses. The research results indicate that the contagion of oscillations among different contracts in the bank's loan portfolio is not unidirectional. Additionally, it cannot be definitively claimed that the spillover of risk shocks from one contract to another is symmetric. This study is anticipated to contribute to the enhancement of predictive model performance and the development of effective risk management strategies in banks.

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