This paper proposes an integrated risk management framework that includes 1) measuring risk of credit portfolios, 2) implementing (macro) stress-test, and 3) setting risk limits by using the estimated systematic latent factor specific to capture the housing market cycle. To this end, we extract information from a set of real-estate market variables based on the FAVAR methodology proposed by Bernanke, Boivin and Eliasz (2005). Then, we show how to apply the estimated systematic factor to the risk management specific to the housing market in an integrated way within the Vasicek one-factor credit model. Our proposed methodology is very fitted to analyze risk of slow-moving and low-defaultable capitals such as alternative investments.
Keywords: Housing Cycle, FAVAR, Risk Management
JEL Classifications: R3, E17, G32
