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Specification and Calibration Errors in Measures of Portfolio Credit Risk: The Case of the ASRF Model

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Author Info
Nikola Tarashev (Monetary and Economic Department, Bank for International Settlements)
Haibin Zhu (Monetary and Economic Department, Bank for International Settlements)
Abstract

This paper focuses on the asymptotic single-risk-factor (ASRF) model in order to analyze the impact of specification and calibration errors on popular measures of portfolio credit risk. Violations of key assumptions of this model are found to be virtually inconsequential, especially for large, welldiversified portfolios. By contrast, flaws in the calibrated interdependence of credit risk across exposures, caused by plausible small-sample estimation errors or rule-of-thumb values of asset return correlations, can lead to significant inaccuracies in measures of portfolio credit risk. Similar inaccuracies arise under standard assumptions regarding the tails of the distribution of asset returns.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 4 (2008)
Issue (Month): 2 (June)
Pages: 129-173
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Handle: RePEc:ijc:ijcjou:y:2008:q:2:a:4

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

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    Other versions:
  5. Lopez, Jose A., 2004. "The empirical relationship between average asset correlation, firm probability of default, and asset size," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 265-283, April. [Downloadable!] (restricted)
    Other versions:
  6. 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. [Downloadable!]
  7. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October. [Downloadable!] (restricted)
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  9. Masschelein, Nancy & Düllmann, Klaus, 2006. "Sector concentration in loan portfolios and economic capital," Discussion Paper Series 2: Banking and Financial Studies 2006,09, Deutsche Bundesbank, Research Centre. [Downloadable!]
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