Calibrating asset correlation for Indian corporate exposures: Implications for regulatory capital
AbstractPurpose – This paper is a first attempt to empirically calibrate the default and asset correlation for large companies in India and elaborate its implications for credit risk capital estimation for a bank. Design/methodology/approach – The authors estimate default probabilities and default correlations of long-term bonds of 542 Indian corporates using rating transitions and pair-wise migrations over ten year cohorts of firms. Further, the implicit asset correlation from the estimated default correlations and default thresholds are derived using the asymptotic single risk factor approach. Findings – The authors find evidence that default correlations are time variant and vary across rating grades and industries. The highest correlations are observed between companies within the same rating grades (systematic risk impact) and within the same industry (industry specific impact). More interestingly, significantly smooth monotonic relationship between the probability of default (PD) and asset correlation as prescribed by the Basel II IRB document (2006) are not found. Moreover, it is found that the asset correlation range for Indian corporates do not match with what is prescribed for corporate exposures by BCBS. Originality/value – The authors address the dilemma implied by the negative relationship between PD and asset correlation as suggested by BCBS IRB formula and other research for developed economies with estimates of asset correlation for and emerging market like India and demonstrate its implications on the estimation of credit risk capital.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Journal of Risk Finance.
Volume (Year): 8 (2007)
Issue (Month): 4 (August)
Contact details of provider:
Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Stan Uryasev & Ursula A. Theiler & Gaia Serraino, 2010. "Risk-return optimization with different risk-aggregation strategies," Journal of Risk Finance, Emerald Group Publishing, vol. 11(2), pages 129-146, February.
- Bandyopadhyay, Arindam & Ganguly, Sonali, 2011.
"Empirical estimation of default and asset correlation of large corporates and banks in India,"
33057, University Library of Munich, Germany.
- Arindam Bandyopadhyay & Sonali Ganguly, 2013. "Empirical estimation of default and asset correlation of large corporates and banks in India," Journal of Risk Finance, Emerald Group Publishing, vol. 14(1), pages 87-99, January.
- Bandyopadhyay, Arindam, 2010. "Understanding the Effect of Concentration Risk in the Banks’ Credit Portfolio: Indian Cases," MPRA Paper 24822, University Library of Munich, Germany.
- Bandyopadhyay, Arindam, 2011. "Internal Assessment of Credit Concentration Risk Capital: A Portfolio Analysis of Indian Public Sector Bank," MPRA Paper 28672, University Library of Munich, Germany.
- Adela Socol & Adina Danuletiu & Mihaela Aldea, 2009. "An Empirical Study Of Correlation Between Net Assets And Own Funds In The Romanian Banking System During 2001-2008," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(11), pages 48.
- Socol Adela & Iuga Iulia, 2010. "Study Of Correlation Between Average Interest Rate And Non-Performing Loans In The Romanian Banking System During 2006- February 2010," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 777-782, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Harris).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.