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On the cyclicality of default rates of banks: A comparative study of the asset correlation and diversification effects

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  • Blümke, Oliver

Abstract

In credit portfolio modeling the asset correlation parameter is used to describe the degree of default rates fluctuations. In this article we estimate the asset correlation parameter for banks and other industry sectors from default data. We find that estimates of the asset correlation vary substantially among the different segments and that banks exhibit a much larger asset correlation parameter, larger also than the regulatory value of the Basel Accord. For pooled data the asset correlation parameter shrinks due to diversification effects.

Suggested Citation

  • Blümke, Oliver, 2018. "On the cyclicality of default rates of banks: A comparative study of the asset correlation and diversification effects," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 65-77.
    • Handle: RePEc:eee:empfin:v:47:y:2018:i:c:p:65-77
    DOI: 10.1016/j.jempfin.2018.03.003
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    Cited by:

    1. Shanshan Jiang & Jie Wang & Ruiting Dong & Yutong Li & Min Xia, 2023. "Systemic Risk with Multi-Channel Risk Contagion in the Interbank Market," Sustainability, MDPI, vol. 15(3), pages 1-24, February.

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    More about this item

    Keywords

    Basel Accord; Asset correlation; Banks; Financial Crisis; Default rates;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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