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Measuring portfolio credit risk: modelling versus calibration errors

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

Volume (Year): (2007)
Issue (Month): (March)
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Handle: RePEc:bis:bisqtr:0703i

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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