Asset correlations: shifting tides
AbstractThe Basel II accord outlines a general framework for determining regulatory capital requirements for credit risk portfolios. Different obligors usually operate independent socio-economic environments and these structural correlations are the main reason why regulatory capital is needed. Therefore, it is not surprising that an important component of the regulatory regime for capital is the asset correlation between obligors. Basel II has set a range for corporate asset correlations from 8 to 24 %, the exact value depending on several individual firm characteristics.We use monthly asset value data to calculate asset correlations and compare these with Basel II as well as results from other papers. Our results are in line with literature but a clear difference is found between the majority of these results and the results from Basel II and some major software providers. We discuss these differences and offer some explanations as an attempt to reconcile the differences. The impact of horizon is considered as well
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/120989.
Date of creation: 2006
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Web page: http://www.kuleuven.be
Research; Approximation; Distribution; Risk; Risk measure; Lognormal; Random variables; Variables; Lower bounds; Choice; Variance; Goodness of fit; Actuarial; Problems; Framework; Requirements; Credit; Portfolio; Impact; Software; Value; Data;
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- Petr Jakubík, 2006. "Does Credit Risk Vary with Economic Cycles? The Case of Finland," Working Papers IES 2006/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2006.
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