Ratings versus equity-based credit risk modelling: an empirical analysis
AbstractBanks have recently developed new techniques for gauging the credit risk associated with portfolios of illiquid, defaultable instruments. These techniques could revolutionise banks' management of credit risk and could in the longer term serve as a more risk-sensitive basis for calculating regulatory capital on banks' loan books than the current 8% capital charge. In this paper, examples are implemented of the two main types of credit risk model developed so far: ratings-based and equity-based approaches. Using price data on large eurobond portfolios, the paper assesses, on an out-of-sample basis, how well these models track the risks they claim to measure.
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Date of creation: May 2001
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