This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

The empirical relationship between average asset correlation, firm probability of default and asset size

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Jose A. Lopez

Additional information is available for the following registered author(s):

Abstract

The asymptotic single risk factor (ASRF) approach is a simplified framework for determining regulatory capital charges for credit risk and has become an integral part of how credit risk capital requirements are to be determined under the second Basel Accord. Within this approach, a key regulatory parameter is the average asset correlation. In this paper, we examine the empirical relationship between the average asset correlation, firm probability of default and firm asset size measured by the book value of assets by imposing the ASRF approach within the KMV methodology for determining credit risk capital requirements. Using data from year-end 2000, credit portfolios consisting of U.S., Japanese and European firms are analyzed. The empirical results suggest that average asset correlation is a decreasing function of probability of default and an increasing function of asset size. When compared with the average asset correlations proposed by the Basel Committee on Banking Supervision in November 2001, the empirical average asset correlations further suggest that accounting for firm asset size, especially for larger firms, may be important. In conclusion, the empirical results suggest that a variety of factors may impact average asset correlations within an ASRF framework, and these factors may need to be accounted for in the final calculation of regulatory capital requirements for credit risk.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. 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.

File URL: http://www.frbsf.org/publications/economics/papers/2002/wp02-05bk.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 2002-05.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 2002
Date of revision:
Handle: RePEc:fip:fedfap:2002-05

Contact details of provider:
Postal: P.O. Box 7702, San Francisco, CA 94120-7702
Phone: (415) 974-2000
Fax: (415) 974-3333
Email:
Web page: http://www.frbsf.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.frbsf.org/popups/fiporder.html

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Risk management;

Other versions of this item:

References listed on IDEAS
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.:
  1. Michael B. Gordy, 1998. "A comparative anatomy of credit risk models," Finance and Economics Discussion Series 1998-47, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Michael B. Gordy, 2000. "Credit VAR and risk-bucket capital rules: a reconciliation," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 406-417.
  4. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January. [Downloadable!] (restricted)
  5. Beverly J. Hirtle & Mark Levonian & Marc Saidenberg & Stefan Walter & David Wright, 2001. "Using credit risk models for regulatory capital: issues and options," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 19-36. [Downloadable!]
Full references

Cited by:
(explanations, 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.)

  1. Mager, Ferdinand & Schmieder, Christian, 2008. "Stress testing of real credit portfolios," Discussion Paper Series 2: Banking and Financial Studies 2008,17, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Eva Catarineu-Rabell & Patricia Jackson & Dimitrios P Tsomocos, . "Procyclicality and the new Basel Accord - banks' choice of loan rating system," Bank of England working papers 181, Bank of England. [Downloadable!]
    Other versions:
  3. Fabrizio Fabi & Sebastiano Laviola & Paolo Marullo Reedtz, 2005. "Lending decisions, procyclicality and the New Basel Capital Accord," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 361-91 Bank for International Settlements. [Downloadable!]
  4. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer, vol. 26(2), pages 161-191, October. [Downloadable!] (restricted)
  5. Schmidt, Rafael & Schmieder, Christian, 2007. "Modelling dynamic portfolio risk using risk drivers of elliptical processes," Discussion Paper Series 2: Banking and Financial Studies 2007,07, Deutsche Bundesbank, Research Centre. [Downloadable!]
  6. Klaus Düllmann & Agnieszka Sosinska, 2007. "Credit default swap prices as risk indicators of listed German banks," Financial Markets and Portfolio Management, Springer, vol. 21(3), pages 269-292, September. [Downloadable!] (restricted)
  7. Repullo, Rafael & Suarez, Javier, 2003. "Loan Pricing Under Basel Capital Requirements," CEPR Discussion Papers 3917, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Jose A. Lopez, 2005. "Empirical analysis of the average asset correlation for real estate investment trusts," Working Paper Series 2005-22, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  9. Stéphanie Duchemin & Marie-Paule Laurent & Mathias Schmit, 2003. "Asset return correlation: The case of automotive lease portfolios," Working Papers CEB 03-007.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  10. Ethan Cohen-Cole, 2007. "Asset liquidity, debt valuation and credit risk," Quantitative Analysis Unit Working Paper QAU07-5, Federal Reserve Bank of Boston. [Downloadable!]
  11. Masschelein, Nancy & Düllmann, Klaus, 2006. "Sector concentration in loan portfolios and economic capital," Discussion Paper Series 2: Banking and Financial Studies 2006,09, Deutsche Bundesbank, Research Centre. [Downloadable!]
  12. Düllmann, Klaus & Kunisch, Michael & Küll, Jonathan, 2008. "Estimating asset correlations from stock prices or default rates: which method is superior?," Discussion Paper Series 2: Banking and Financial Studies 2008,04, Deutsche Bundesbank, Research Centre. [Downloadable!]
  13. Klaus Düllmann & Nancy Masschelein, 2006. "Sector Concentration in Loan Portfolios and Economic Capital," Research series 200611-17, National Bank of Belgium. [Downloadable!]
  14. Lutz Hahnenstein, 2004. "Calibrating the CreditMetrics™ correlation concept — Empirical evidence from Germany," Financial Markets and Portfolio Management, Springer, vol. 18(4), pages 358-381, December. [Downloadable!] (restricted)
  15. Güttler, André & Raupach, Peter, 2008. "The impact of downward rating momentum on credit portfolio risk," Discussion Paper Series 2: Banking and Financial Studies 2008,16, Deutsche Bundesbank, Research Centre. [Downloadable!]
  16. Nikola Tarashev & Haibin Zhu, 2008. "Specification and Calibration Errors in Measures of Portfolio Credit Risk: The Case of the ASRF Model," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 129-173, June. [Downloadable!]
  17. Featherstone, Allen & Langemeier, Michael & Haverkamp, Kent, 2006. "Credit Quality of Kansas Farms," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35309, Southern Agricultural Economics Association. [Downloadable!]
Statistics
Access and download statistics

Did you know? Citation analysis on IDEAS includes online papers that are freely accessible and whose text could be automatically analyzed, currently about 210000 papers.

This page was last updated on 2009-11-18.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.