Empirical estimation of default and asset correlation of large corporates and banks in India
AbstractEstimation of default and asset correlation is crucial for banks to manage and measure portfolio credit risk. This would require studying the risk profile of the banks’ entire credit portfolio and developing the appropriate methodology for the estimation of default dependence. Measurement and management of correlation risk in the credit portfolio of banks has also become an important area of concern for bank regulators worldwide. The BCBS (2006) has specifically included an asset correlation factor in the computation of credit risk capital requirement by banks adopting the Internal Ratings Based Approach. We estimate default correlation in the credit portfolio of banks. These correlation estimates will help the regulator in India to understand the linkage between bank’s portfolio default risks with the systematic factors. We also derive default and asset correlations of Indian corporate and compare it with global scenario. The work tries to find the relationship of the correlation to the default probability as specified by the Basel committee. The findings of this paper could be used further in estimating portfolio credit risk, economic capital and risk adjusted returns on economic capital for large corporate exposures of banks.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 33057.
Date of creation: 16 Aug 2011
Date of revision:
Default Correlation; Asset Correlation; Credit Portfolio Risk;
Other versions of this item:
- Arindam Bandyopadhyay & Sonali Ganguly, 2013. "Empirical estimation of default and asset correlation of large corporates and banks in India," Journal of Risk Finance, Emerald Group Publishing, vol. 14(1), pages 87-99, January.
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-05 (All new papers)
- NEP-CFN-2011-09-05 (Corporate Finance)
- NEP-RMG-2011-09-05 (Risk Management)
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.:
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