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Hacked AIRB Black Box

Author

Listed:
  • Osadchiy, Maksim
  • Sidorov, Alexander

Abstract

A loss distribution of a credit portfolio in framework of AIRB is determines as a product of Vasicek distribution function by an adjustment coefficient, which allows for the Loss Given Default as an exogenous parameter LGD and the maturity of obligations T. This coefficient depends also on probability of default (PD) in non-obvious way, which does not explained in Basel documentation. It is not clear also what is the scope of validity of this formula, though the form of this adjustment allows to suspect that it is approximation of another formula, which id more and more complicated. In essence, the AIRB adjustment is a kind of the “black box.” Authors tried to hack this black box using the generalized Vasicek approach. Unlike the Vasicek model describing only the distribution of defaults, the obtained in this paper Vasicek-Merton model describes the loss distribution and it seems that the AIRB model is just an approximation of the Vasicek-Merton model.

Suggested Citation

  • Osadchiy, Maksim & Sidorov, Alexander, 2020. "Hacked AIRB Black Box," MPRA Paper 100801, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:100801
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    File URL: https://mpra.ub.uni-muenchen.de/104138/1/MPRA_paper_104138.pdf
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    References listed on IDEAS

    as
    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    loss distribution; loss given default; Vasicek model; Merton firm; AIRB model;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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