PT - JOURNAL ARTICLE AU - Cheng-Kun Kuo AU - Chih-Wei Lee TI - Integrating Market and Credit Risk Using a Simplified Frailty Default Correlation Structure AID - 10.3905/jfi.2007.688965 DP - 2007 Jun 30 TA - The Journal of Fixed Income PG - 48--58 VI - 17 IP - 1 4099 - https://pm-research.com/content/17/1/48.short 4100 - https://pm-research.com/content/17/1/48.full AB - This article adopts a simplified approach to assess the correlation structure of credit risk. The approach could significantly reduce the numbers of estimated parameters in credit risk measurement. Thus it provides a simple way to integrate market risk smoothly that leads to a unified framework for computing fixed-income portfolio Value at Risk (VaR). Furthermore, based on recent research findings that frailty factors could induce a large estimated increase in default clustering, we also consider frailty variables in our integrated model. Using a portfolio as illustration, it is shown that the traditional approach where the correlation of market and credit risk is not considered, or frailty is not accounted for, may under-estimate VaR.TOPICS: Fixed income and structured finance, VAR and use of alternative risk measures of trading risk, credit risk management