The Importance of Estimation Uncertainty in a Multi-Rating Class Loan Portfolio
AbstractThis article seeks to make an assessment of estimation uncertainty in a multi-rating class loan portfolio. Relationships are established between estimation uncertainty and parameters such as probability of default, intra- and inter-rating class correlation, degree of inhomogeneity, number of rating classes used, number of debtors and number of historical periods used for parameter estimations. In addition, by using an exemplary portfolio based on Moody’s ratings, it becomes clear that estimation uncertainty does indeed have an effect on interest rates.
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Bibliographic InfoPaper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 11.
Date of creation: Jul 2011
Date of revision:
credit portfolio risk; estimation uncertainty; bootstrapping; economic equity;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-02 (All new papers)
- NEP-BAN-2011-08-02 (Banking)
- NEP-RMG-2011-08-02 (Risk Management)
- NEP-UPT-2011-08-02 (Utility Models & Prospect Theory)
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