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Sensitivity Analysis of Credit Risk Measures in the Beta Binomial Framework

Author

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  • Franck Moraux

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper reconsiders the Beta Binomial approach for modeling default risk in homogenous credit portfolio. It first introduces a new parameterization of the Beta Mixing Distribution that is now a function of the common default probability and the common default correlation. It then focuses on the correlation parameter and derives closed-form expressions for sensitivities of key credit risk indicators. Results of the sensitivity and elasticity analysis show that the common default correlation impacts on the credit at risk and expected shortfall quite differently. One also performs an application on CDOs to highlight the key role of the common default correlation on the different tranches

Suggested Citation

  • Franck Moraux, 2010. "Sensitivity Analysis of Credit Risk Measures in the Beta Binomial Framework," Post-Print halshs-00446903, HAL.
    • Handle: RePEc:hal:journl:halshs-00446903
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    Cited by:

    1. Peter Simmons & Nongnuch Tantisantiwong, 2018. "Evaluation of Individual and Group Lending under Asymmetric information," Discussion Papers 18/01, Department of Economics, University of York.
    2. Peter J. Simmons & Nongnuch Tantisantiwong, 2022. "The Socially Optimal Loan Auditing with Multiple Projects," Discussion Papers 22/07, Department of Economics, University of York.
    3. Reichel, Lukas & Schmeiser, Hato & Schreiber, Florian, 2021. "Sometimes more, sometimes less: Prudence and the diversification of risky insurance coverage," European Journal of Operational Research, Elsevier, vol. 292(2), pages 770-783.

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