Implied asset correlation in retail loan portfolios

Marius Botha and Gary Van Vuuren

Journal of Risk Management in Financial Institutions, 2010, vol. 3, issue 2, 156-173

Abstract: Credit risk arises from the interaction of multiple connected factors, but the most frequently-used models designed to measure it assume only one. These models — which, inter alia, fit distributions to loss data — are heavily influenced by the common correlation between loan values and the single factor (commonly assumed to be some gauge of economic health). Scarce and shoddy loss data for retail loan classes hamper the estimation of this correlation. A technique is proposed to calculate asset correlations embedded in empirical loss data. These values are then compared with those stipulated by the Basel II Accord for minimum capital requirements.

Keywords: retail loans; asset correlation; Vasicek distribution; Basel II (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2010:v:3:i:2:p:156-173

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