Measuring portfolio credit risk: modelling versus calibration errors
A model-based assessment of credit risk is subject to both specification and calibration errors. Focusing on a well known credit risk model, we propose a methodology for quantifying the relative importance of alternative sources of such errors and apply this methodology to a large data set. We find that flawed calibration of the model can substantially affect the measured level of portfolio credit risk. By contrast, a model misspecification generally has a limited impact, especially for large, well diversified portfolios.
Volume (Year): (2007)
Issue (Month): (March)
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