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Measures for Comparing Transition Matrices from a Value-at-Risk Perspective
Company: University of Karlesruhe
Company Url: Click here to open
Year Of Publication: 2004
Month Of Publication: January
Pages: 24
Download Count: 816
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Comment Num: 0
Language: EN
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Who Can Read: Free
Date: 9-12-2004
Publisher: Administrator
Summary
In credit risk management, migration or transition matrices are major inputs for risk management, Credit Value-at-Risk or derivative pricing. In some credit risk models, estimated transition matrices are used for VaR simulation purposes or adjusted to provide risk-neutral transition probabilites. We examine measures for comparing matrices from an angle of risk assessment. We provide criteria that can measure the impact of differences inmigration matrices on risk figures and show that the generally used metricsare not able to capture these impacts. We therefore propose a new measurefor comparing matrices in a more risk-sensitive way. We demonstrate the ad-vantages of the proposed measure over more traditional cell-by-cell distancemetrics and eigenvalue-based metrics. We then consider a simplified creditportfolio and obtain significantly promising results with high correlation between the proposed new distance measures and simulated VaR figures.
Author(s)
Trueck, Stefan Sign in to follow this author
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