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Failure Of Saddle-Point Method In The Presence Of Double Defaults

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  • Eva Lütkebohmert

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Abstract

We show that the saddle-point approximation method to quantify the impact of undiversi?ed idiosyncratic risk in a credit portfolio is inappropriate in the presence of double default effects. Speci?cally, we prove that there does not exist an equivalent formula to the granularity adjustment, that accounts for guarantees, in case of the extended single-factor CreditRisk+ model. Moreover, in case of the model underlying the double default treatment within the internal ratings based (IRB) approach of Basel II, the saddle-point equivalent to the GA is too complex and involved to be competitive to a standard Monte Carlo approach.

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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse19_2009.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse19_2009.

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Length: 9
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:bon:bonedp:bgse19_2009

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: analytical approximation; Basel II; double default; granularity adjustment; IRB approach; saddle- point approximation;

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