Stress testing has become a crucial point on the Basel II agenda, mainly as Pillar I estimatesdo not explicitly take portfolio concentration into account. We start from the credit portfolioof the German pension insurer being a cross-sectional representation of the German economyand subsequently...

This paper sets out to help explain why estimates of asset correlations based on equityprices tend to be considerably higher than estimates based on default rates. Resolving thisempirical puzzle is highly important because, rstly, asset correlations are a key driver ofcredit risk and, secondly,...

Like all the member states of the European Union, Slovenia was also obligated to implement EUDirectives 2006/48/EC and 2006/49/EC into national banking legislative. Basel II rules were implementedinto Slovenian legislative in December 2006 and have been valid from 1st of January 2007. Before...

Financial institutions are faced with the challenge to forecast future credit portfolio losses.It is common practice to focus on portfolio models consisting of a limited set of parameters,such as the probability of default, asset correlation, loss given default or exposure at default.A simple...

In addition to “classical” approaches, such as the Gaussian CreditMetrics or Basel II model, recentlythe use of other copulas has been proposed in the area of credit risk for modeling loss distributions,particularly T copulas which lead to fatter tails ceteris paribus. As an amendment to...

A major topic in retail lending is the measurement of the inherent portfolio credit risk. Two importantparameters are default probabilities (PDs) and correlations. Both are considered in theNew Basel Accord. Due to limited empirical evidence on their magnitude, in particular for retailcredit...

Among the most crucial input parameters for credit portfolio risk models are the co-movements ofdefault risks. Due to limited empirical evidence about the magnitude of correlations the New BaselCapital Accord sets standard requirements for calculating regulatory capital requirements, e.g. in...