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Implied asset correlation in retail loan portfolios

Author

Listed:
  • Botha, Marius
  • Vuuren, Gary Van

Abstract

Credit risk arises from the interaction of multiple connected factors, but the most frequently-used models designed to measure it assume only one. These models — which, inter alia, fit distributions to loss data — are heavily influenced by the common correlation between loan values and the single factor (commonly assumed to be some gauge of economic health). Scarce and shoddy loss data for retail loan classes hamper the estimation of this correlation. A technique is proposed to calculate asset correlations embedded in empirical loss data. These values are then compared with those stipulated by the Basel II Accord for minimum capital requirements.

Suggested Citation

  • Botha, Marius & Vuuren, Gary Van, 2010. "Implied asset correlation in retail loan portfolios," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 3(2), pages 156-173, March.
    • Handle: RePEc:aza:rmfi00:y:2010:v:3:i:2:p:156-173
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    Citations

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    Cited by:

    1. Magdalena Pisa & Dennis Bams & Christian Wolff, 2012. "Modeling default correlation in a US retail loan portfolio," LSF Research Working Paper Series 12-19, Luxembourg School of Finance, University of Luxembourg.
    2. Cho, Yongbok & Lee, Yongwoong, 2022. "Asymmetric asset correlation in credit portfolios," Finance Research Letters, Elsevier, vol. 49(C).
    3. Muteba Mwamba, John Weirstrass & Mhlophe, Bongani, 2019. "Modelling Asset Correlations of Revolving Loan Defaults in South Africa," MPRA Paper 97340, University Library of Munich, Germany.
    4. Wolff, Christian & Bams, Dennis & Pisa, Magdalena, 2015. "Credit risk characteristics of US small business portfolios," CEPR Discussion Papers 10889, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    retail loans; asset correlation; Vasicek distribution; Basel II;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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