The Extreme Value Theory as a Risk Modeling Tool for the Non-Performing Loans

Attia Rani, Faisal Mir, Faisal Shehzad, Muhammad Shujahat

Abstract


The study proposes that the Non-Performing Loans (NPLs) is a rare event. Consequently, this study proposes that the classes of time series modeling and macroeconomic approaches are not appropriate for the risk modeling and assessment of NPLs. Consequently, this study proposes Extreme Value Theory (EVT) as an alternative tool for the risk modeling and assessment of NPL. The data of Asian countries for the 28 quarters (2010-2016) available on the World Bank website is accessed for testing the proposition with the use of analysis techniques. It was found that extreme value theory could be the most suitable tool for the risk assessment of non-performing loans. Moreover, the study ranks the Asian countries concerning the risk of NPLs. Finally, the study discusses the implications for the financial institutions for NPLs and policymakers.

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References


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DOI: http://dx.doi.org/10.21015/vtess.v8i1.602

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