Asset correlations for credit card defaults
AbstractThe capital requirements formula within the Basel II Accord is based on a Merton one-factor model and in the case of credit cards an asset correlation of 4% is assumed. In this article we estimate the asset correlation for two datasets assuming the one-factor model. We find that the asset correlations assumed by Basel II are much higher than those observed in the datasets we analyse. We show the reduction in capital requirements that a typical lender would have if the values we estimated were implemented in the Basel Accord in place of the current values.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 22 (2012)
Issue (Month): 2 (January)
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Web page: http://www.tandfonline.com/RAFE20
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- Bellotti, Tony & Crook, Jonathan, 2013. "Forecasting and stress testing credit card default using dynamic models," International Journal of Forecasting, Elsevier, vol. 29(4), pages 563-574.
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