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Asset correlations in single factor credit risk models: an empirical investigation

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  • Hestia Jacomina Stoffberg
  • Gary van Vuuren

Abstract

The internal ratings--based (IRB) approach (based on a single risk factor model) was designed by the Basel Committee on Banking Supervision (BCBS) to determine banks’ regulatory credit risk capital. Key inputs of the model -- asset correlations -- are prescribed by the regulator; relevant banks must use them for capital determination. To ascertain whether these correlations are too onerous or too lenient, empirical asset correlations embedded in loss data spanning different loss milieu were backed out of the regulatory model. Static and rolling correlations over a period of time were compared with the prescribed correlations for developed and developing economies and found to be significantly more conservative.

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  • Hestia Jacomina Stoffberg & Gary van Vuuren, 2016. "Asset correlations in single factor credit risk models: an empirical investigation," Applied Economics, Taylor & Francis Journals, vol. 48(17), pages 1602-1617, April.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:17:p:1602-1617
    DOI: 10.1080/00036846.2015.1103040
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    Cited by:

    1. Cho, Yongbok & Lee, Yongwoong, 2022. "Asymmetric asset correlation in credit portfolios," Finance Research Letters, Elsevier, vol. 49(C).

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