A risk-sensitive approach for stressed transition probability matrixes

Ahmet Perilioglu, Karina Perilioglu and Sukriye Tuysuz

Journal of Risk Model Validation

Abstract: An increased risk of credit-related exposures and the contagion effect of the recent global financial crisis have led to stringent regulations and the need for accurate credit risk models. Under the Basel III Accord, adequate stress testing models are required to have a strong capital base and to cover the unexpected losses for a range of risks. In this paper, a simulation-based methodology is proposed for the estimation of stressed through-the-cycle transition probabilities to provide a practical technique in stress testing. Unlike the traditional asset-correlation-based models, this study considers time-varying correlations between the rating migrations. An extended loss function, which is sensitive to the portfolio credit qualities and credit spreads, is applied to improve the estimation power of the transition probabilities. The model targets accuracy of credit loss estimations, and it is analyzed under different portfolio structures. The derived transition probability matrixes are downgrade oriented and capture the stress conditions.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-risk-model-validat ... probability-matrixes (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ5:5399941

Access Statistics for this article

More articles in Journal of Risk Model Validation from Journal of Risk Model Validation
Bibliographic data for series maintained by Thomas Paine ().