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http://hdl.handle.net/10419/19728
  
Title:Forecasting Credit Portfolio Risk PDF Logo
Authors:Hamerle, Alfred
Liebig, Thilo
Scheule, Harald
Issue Date:2004
Series/Report no.:Discussion Paper, Series 2: Banking and Financial Supervision 2004,01
Abstract:The main challenge of forecasting credit default risk in loan portfolios is forecasting the default probabilities and the default correlations. We derive a Merton-style threshold-value model for the default probability which treats the asset value of a firm as unknown and uses a factor model instead. In addition, we demonstrate how default correlations can be easily modeled. The empirical analysis is based on a large data set of German firms provided by Deutsche Bundesbank. We find that the inclusion of variables which are correlated with the business cycle improves the forecasts of default probabilities. Asset and default correlations depend on the factors used to model default probabilities. The better the point-in-time calibration of the estimated default probabilities, the smaller the estimated correlations. Thus, correlations and default probabilities should always be estimated simultaneously.
Subjects:asset correlation
bank regulation
Basel II
credit risk
default correlation
default probability
logit model
probit model
JEL:C41
G21
C23
Document Type:Working Paper
Appears in Collections:Discussion Paper Series 2: Banking and Financial Studies, Deutsche Bundesbank

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