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Systematic Risk In Homogeneous Credit Portfolios
Company: Credit Risk: Measurement, Evaluation and Management
Company Url: Click here to open
Year Of Publication: 2003
Month Of Publication: July
Download Count: 285
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 8-16-2007
Publisher: Administrator
This note has a two-fold intention: First, we want to present a simple approach for estimating thesystematic risk, that is, the parameter R2, for a homogeneous credit portfolio. Second, we discussthe proposal of the Basel Committee on Banking Supervision, see [1], to fix the asset correlationrespectively the systematic risk for the calibration of the benchmark risk weights for corporate loansat the 20% level. In our discussion we apply the method introduced in the first part of this noteto Moody’s corporate bond default statistics and compare our estimated APP correlation with thecorrelation level suggested in the Basel II consultative document. On one hand, our findings showthat the average asset correlation within a rating class is close to the one suggested by the Basel IIapproach. On the other hand, the assumption of a one-factor model with a uniform asset correlationof 20% as suggested in the current draft of the new capital accord turns out to be violated as soon aswe consider the correlation between different segments, e.g., rating segments as in our case
Bluhm, Christian Sign in to follow this author
Overbeck, Ludger Sign in to follow this author
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