On partial defaults in portfolio credit risk: Comparing economic and regulatory view
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Date
2006-01-25T12:55:45Z
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Abstract
Most credit portfolio models calculate the loss distribution of a portfolio consisting solely of performing counterparts. We develop two models that account for defaulted counterparts in the calculation of the economic capital. First, we model the portfolio of non-performing counterparts standalone. The second approach derives the integrated loss distribution for the
non-performing and the performing portfolio. Both calculations are supplemented by formulae for contributions of the single counterpart to the
economic capital. Calibrating the models allows for an impact study and a comparison with Basel II.JEL subject classifications. C51, G11, G18, G33
Most credit portfolio models calculate the loss distribution of a portfolio consisting solely of performing counterparts. We develop two models that account for defaulted counterparts in the calculation of the economic capital. First, we model the portfolio of non-performing counterparts standalone. The second approach derives the integrated loss distribution for the non-performing and the performing portfolio. Both calculations are supplemented by formulae for contributions of the single counterpart to the economic capital. Calibrating the models allows for an impact study and a comparison with Basel II. JEL subject classifications. C51, G11, G18, G33
Most credit portfolio models calculate the loss distribution of a portfolio consisting solely of performing counterparts. We develop two models that account for defaulted counterparts in the calculation of the economic capital. First, we model the portfolio of non-performing counterparts standalone. The second approach derives the integrated loss distribution for the non-performing and the performing portfolio. Both calculations are supplemented by formulae for contributions of the single counterpart to the economic capital. Calibrating the models allows for an impact study and a comparison with Basel II. JEL subject classifications. C51, G11, G18, G33
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Keywords
Basel II, Credit portfolio model, Impact study, Loss distribution, Non-performing portfolio, Performing portfolio