Hanson, Samuel G.; Pesaran, M. Hashem; Schuermann, Til - In: Journal of Empirical Finance 15 (2008) 4, pp. 583-612
This paper examines the impact of neglected heterogeneity on credit risk. We show that neglecting heterogeneity in firm returns and/or default thresholds leads to underestimation of expected losses (EL), and its effect on portfolio risk is ambiguous. Once EL is controlled for, the impact of...