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Title:Failure of saddle-point method in the presence of double defaults PDF Logo
Authors:Lütkebohmert, Eva
Issue Date:2009
Series/Report no.:Bonn econ discussion papers 2009,19
Abstract:We show that the saddle-point approximation method to quantify the impact of undiversified idiosyncratic risk in a credit portfolio is inappropriate in the presence of double default effects. Specifically, we prove that there does not exist an equivalent formula to the granularity adjustment, that accounts for guarantees, in case of the extended single-factor Credit Risk model. Moreover, in case of the model underlying the double default treatment within the internal ratings based (IRB) approach of Basel II, the saddle-point equivalent to the GA is too complex and involved to be competitive to a standard Monte Carlo approach.
Subjects:analytical approximation
Basel II
double default
granularity adjustment
IRB approach
saddle-point approximation
JEL:G31
G28
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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