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Forward-looking estimation of default probabilities with Italian data Author info | Abstract | Publisher info | Download info | Related research | Statistics Giuseppe Marotta ()
Chiara Pederzoli ()
Costanza Torricelli ()
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The solution adopted in Basel II to deal with procyclicality of capital requirements (i.e. through the cycle ratings and long-run average estimates of default probabilities) implies a reduction in the risk-sensitivity that contradicts the original spirit of the new framework.In order to preserve risk-sensitivity and to dampen procyclicality at the same time, Pederzoli and Torricelli (2005) set up a model which relies on a business cycle forecast in the estimation of the default probability and provide an application for the US. The modelling approach hinges on a forward-looking definition of capital requirements, in anticipation of the business cycle with a possible smoothing effect on the business cycle turning points.The present paper checks the robustness of the approach for the Italian case, where alternative business cycles chronologies are used and ratings have to be approximated by exploiting default data provided by the Bank of Italy. Findings suggest that the comparison between the alternative chronologies is an important issue.
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Paper provided by Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica in its series Heterogeneity and monetary policy with number
0504.
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Length: pages 18
Date of creation: Apr 2005Date of revision:
Handle: RePEc:mod:modena:0504Contact details of provider: Web page: http://www.economia.unimore.it More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Giuseppe Marotta).
Keywords: Basel II ; business cycle ; capital requirement ; default probability ; procyclicality ; Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
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Other versions:
Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002.
"Ratings migration and the business cycle, with application to credit portfolio stress testing ,"
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"The Italian Business Cycle: Coincident and Leading Indicators and Some Stylized Facts ,"
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GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 59(2), pages 147-220, September.
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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.)
Costanza Torricelli & Marianna Brunetti, 2006.
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350, Society for Computational Economics.
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"Credit Risk and the Finnish Economy ,"
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cipollini, andrea & missaglia, giuseppe, 2007.
"Dynamic Factor analysis of industry sector default rates and implication for Portfolio Credit Risk Modelling ,"
MPRA Paper
3582, University Library of Munich, Germany.
[Downloadable!]
Other versions: Chiara Pederzoli, 2007.
"Default risk: Poisson mixture and the business cycle ,"
Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance)
07052, Universita di Modena e Reggio Emilia, FacoltĂ di Economia "Marco Biagi".
[Downloadable!]
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