The Empirical Relation between Credit Quality, Recovery, and Correlation

Daniel Rosch and Harald Scheule
Additional contact information
Daniel Rosch: Leibniz Universitat Hannover

No 222009, Working Papers from Hong Kong Institute for Monetary Research

Abstract: The majority of industry credit portfolio risk models, as well as recent scientific results, are based on isolated modules for default probabilities and recoveries in the event of default. This paper shows that these common methods lead to various econometric drawbacks when the parameters are interpreted and aggregated for risk capital allocation and pricing purposes. This paper provides a top down approach in which individual credit risk parameters are derived analytically from a single model. This model allows for a i) dynamic, ii) consistent, and iii) unbiased modeling of credit portfolio risks. An empirical analysis provides evidence for the inferred relationship between credit quality, recovery and correlation.

Keywords: Asset Value; Correlation; Credit Portfolio; Loss Given Default; Merton Model; Probability of Default; Recovery; Volatility (search for similar items in EconPapers)
JEL-codes: C51 G20 G28 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2009-07
New Economics Papers: this item is included in nep-ban, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.hkimr.org/uploads/publication/126/ub_full_0_2_217_wp-no-22_2009.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.hkimr.org/uploads/publication/126/ub_full_0_2_217_wp-no-22_2009.pdf [301 Moved Permanently]--> http://www.aof.org.hk/research/HKIMR/uploads/publication/126/ub_full_0_2_217_wp-no-22_2009.pdf [301 Moved Permanently]--> https://www.aof.org.hk/research/HKIMR/uploads/publication/126/ub_full_0_2_217_wp-no-22_2009.pdf)

Related works:
Working Paper: The Empirical Relation between Credit Quality, Recovery and Correlation (2009)
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:hkm:wpaper:222009

Access Statistics for this paper

More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().