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Latent Variable Approach to Modelling Dependence of Credit Risks: Application to French Firms and Im
Year Of Publication: 2005
Month Of Publication: January
Pages: 25
Download Count: 318
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Comment Num: 0
Language: EN
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Who Can Read: Free
Date: 6-6-2007
Publisher: Administrator
Summary
This paper extends the analysis in “Migration Correlation: Estimation Method and Application to theFrench Companies Rated by the Banque de France” and provides a methodology for valuing dependentdefaults based on the latent variable approach. This methodology underlies all models derived from theMerton’s structural model and includes in particular the Basel II proposition. The “latent correlation” iscalibrated by developing factor models that relate changes in unobservable variable to changes in a smallnumber of economic factors. Our model exploits the relationship between the default correlation and thelatent correlation throughout the joint probability of default. Using a comprehensive rating database managedby the Banque de France, we employ this relationship to calibrate latent correlations and finally to computecredit risk charges at a portfolio l
Author(s)
Foulcher, Sandra Sign in to follow this author
Gourieroux, Christian Sign in to follow this author
Tiomo, Andre Sign in to follow this author
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