Document Type : Research Paper


Allameh Tabataba'i University


One of the most important aspects of credit risk management is determining the capital requirement to cover the credit risk in a bank loan portfolio. This paper discusses the credit risk of a loan portfolio can be obtained by the stochastic recovery rate based on two approaches: beta distribution and short interest rates. The capital required to cover the credit risk is achieved through the Vasicek model. Also, the Black-Scholes Merton model for european call option is utilized to quantify the probability of default. Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) are utilized as measures of risk to evaluate the level of risk obtained by the worst-case Probability Of Default (PD) a stochastic recovery rate is used for calculating VaR which relates to the underlying intensity default. In addition, the intensity default process is assumed to be linear in the short-term interest rate, which is driven by a CIR process. By considering the relevant characteristics with Data Envelopment Analysis (DEA) method, the loan portfolio performance is evaluated. This study proposes the losses which are driven by the stochastic recovery rate and default probability. The empirical investigation measures the PD of eighth stocks from different industries of the Iran stock exchange market by using the Black-Sholes-Merton model.


Main Subjects