A survey of cyclical effects in credit risk measurement model

Linda Allen and Anthony Saunders
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Linda Allen: Zicklin School of Business, Baruch College, CUNY
Anthony Saunders: New York University - Leonard N. Stern School of Business

No 126, BIS Working Papers from Bank for International Settlements

Abstract: We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.

Pages: 43 pages
Date: 2003-01
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Citations: View citations in EconPapers (44)

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