Modelling and calibration errors in measures of portfolio credit risk
AbstractThis paper develops an empirical procedure for analyzing the impact of model misspecification and calibration errors on measures of portfolio credit risk. When applied to large simulated portfolios with realistic characteristics, this procedure reveals that violations of key assumptions of the well-known Asymptotic Single-Risk Factor (ASRF) model are virtually inconsequential. By contrast, flaws in the calibrated interdependence of credit risk across exposures, which are driven by plausible small-sample estimation errors or popular rule-of-thumb values of asset return correlations, can lead to significant inaccuracies in measures of portfolio credit risk. Similar inaccuracies arise under erroneous, albeit standard, assumptions regarding the tails of the distribution of asset returns.
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.
Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 230.
Length: 42 pages
Date of creation: Jun 2007
Date of revision:
Correlated defaults; value at risk; multiple common factors; granularity; estimation error; tail dependence; bank capital;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-14 (All new papers)
- NEP-BAN-2007-08-14 (Banking)
- NEP-RMG-2007-08-14 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Düllmann, Klaus & Scheicher, Martin & Schmieder, Christian, 2007. "Asset correlations and credit portfolio risk: an empirical analysis," Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank, Research Centre 2007,13, Deutsche Bundesbank, Research Centre.
- Lütkebohmert, Eva & Gordy, Michael B., 2007. "Granularity adjustment for Basel II," Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank, Research Centre 2007,01, Deutsche Bundesbank, Research Centre.
- William R. White, 2007. "The housing finance revolution: commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 69-84.
- Antão, Paula & Lacerda, Ana, 2011. "Capital requirements under the credit risk-based framework," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(6), pages 1380-1390, June.
- Jaromir Benes & Michael Kumhof & Douglas Laxton, 2014. "Financial Crises in DSGE Models: A Prototype Model," IMF Working Papers, International Monetary Fund 14/57, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa).
If references are entirely missing, you can add them using this form.