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Granularity Adjustment in a General Factor Model
Year Of Publication: 2005
Month Of Publication: May
Pages: 16
Download Count: 4
View Count: 1801
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 7-31-2010
Publisher: Administrator
The granularity adjustment technique is embedded into a general multi-factor model. This allows a very simple statement of the conditions under which the impact of unsystematic risk factors asymptotically vanishes. It has always been taken for granted that the granularity adjustment must be positive. In this paper, a counter-example with negative value of the granularity adjustment is given for the well-known Vasicek (2002) model. This means a discount in terms of capital reserves for a less diversified credit portfolio. An in-depth analyses of the analytical formula of the granularity adjustment reveals that such negative values are possible if the conditional variance is higher for less favourable values of the systematic risk factors. The reason is that this implies a relatively high survival probability in bad states of nature.
Rau-Bredow, Hans Sign in to follow this author
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