Default probabilities (PDs) and correlations play a crucial role in the New Basel Capital Accord. In commercial credit risk models they are an important constituent. Yet, modeling and estimation of PDs and correlations is still under active discussion. We show how the Basel II one factor model...

The main challenge of forecasting credit default risk in loan portfolios is forecasting the default probabilities and the default correlations. We derive a Merton-style threshold-value model for the default probability which treats the asset value of a firm as unknown and uses a factor model...

In this paper we focus on the analysis of the effect of prediction and estimation risk on the loss distribution, risk measures and economic capital. When variables for the determination of probability of default and loss distribution have to be predicted because they are not available at the...

"Arbitrage CDOs" have recorded an explosive growth during the years before the outbreak of the financial crisis. In the present paper we discuss potential sources of such arbitrage opportunities, in particular arbitrage gains due to mispricing. For this purpose we examine the risk profiles of...

Im vorliegenden Beitrag wird untersucht, wie die Assetkorrelation zwischen zwei Sektoren auf einfache Weise berechnet werden kann und wie sich unterschiedliche Korrelationsannahmen auf die Form und Risikomaße von Verlustverteilungen auswirken. Dazu werden Ausfallzeitreihen von zwei...

The present paper shows how the parameters of three popular portfolio credit risk models can be empiricallyestimated by banks using a Maximum Likelihood framework. We apply the method to a database of Germanfirms provided by Deutsche Bundesbank and analyze the inclusion of macroeconomic and...

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...

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...