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Measuring portfolio credit risk: modelling versus calibration errors

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  • Nikola Tarashev
  • Haibin Zhu

Abstract

A model-based assessment of credit risk is subject to both specification and calibration errors. Focusing on a well known credit risk model, we propose a methodology for quantifying the relative importance of alternative sources of such errors and apply this methodology to a large data set. We find that flawed calibration of the model can substantially affect the measured level of portfolio credit risk. By contrast, a model misspecification generally has a limited impact, especially for large, well diversified portfolios.

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Bibliographic Info

Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2007)
Issue (Month): (March)
Pages:

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Handle: RePEc:bis:bisqtr:0703i

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  1. Jose A. Lopez, 2002. "The empirical relationship between average asset correlation, firm probability of default and asset size," Working Paper Series 2002-05, Federal Reserve Bank of San Francisco.
  2. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Düllmann, Klaus & Scheicher, Martin & Schmieder, Christian, 2007. "Asset correlations and credit portfolio risk: an empirical analysis," Discussion Paper Series 2: Banking and Financial Studies 2007,13, Deutsche Bundesbank, Research Centre.
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