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La correlazione tra PD ed LGD nell’analisi del rischio di credito/The correlation between probability of default and loss given default in the credit risk analysis

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Abstract

The international regulation on banking developed by Basel Committee on Banking Supervision has set a simplified link between default probabilities and loss given default, avoiding to introduce the correlation. The scientific literature ha proposed many models that try to improve the Basel framework. This article examines the most important models proposed in the literature and apply two of them to aggregate data from the Bank of Italy.

Suggested Citation

  • Franco Varetto, 2017. "La correlazione tra PD ed LGD nell’analisi del rischio di credito/The correlation between probability of default and loss given default in the credit risk analysis," IRCrES Working Paper 201714, CNR-IRCrES Research Institute on Sustainable Economic Growth - Moncalieri (TO) ITALY - former Institute for Economic Research on Firms and Growth - Torino (TO) ITALY.
    • Handle: RePEc:csc:ircrwp:201714
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    References listed on IDEAS

    as
    1. Benjamin Bade & Daniel Rösch & Harald Scheule, 2011. "Default and Recovery Risk Dependencies in a Simple Credit Risk Model," European Financial Management, European Financial Management Association, vol. 17(1), pages 120-144, January.
    2. repec:uts:ppaper:v:17:y:2011:i:1:p:120-144 is not listed on IDEAS
    3. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    4. Jiri Witzany, 2013. "Estimating Default and Recovery Rate Correlations," Working Papers IES 2013/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2013.
    5. repec:uts:ppaper:v:18:y:2009:i:1:p:1-26 is not listed on IDEAS
    6. Jakub Seidler & Petr Jakubik, 2009. "The Merton Approach to Estimating Loss Given Default: Application to the Czech Republic," Working Papers 2009/13, Czech National Bank.
    7. Dirk Tasche, 2004. "The single risk factor approach to capital charges in case of correlated loss given default rates," Papers cond-mat/0402390, arXiv.org, revised Feb 2004.
    8. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    9. Daniel Roesch & Harald Scheule, 2009. "Credit Portfolio Loss Forecasts for Economic Downturns," Published Paper Series 2009-2, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    10. Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Default probability; loss given default; correlation; credit risk; credit portfolio model; credit VaR;
    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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

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