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Title:Multi-period defaults and maturity effects on economic capital in a ratings-based default-mode model PDF Logo
Authors:Gürtler, Marc
Heithecker, Dirk
Issue Date:2005
Series/Report no.:Working papers // Institut für Finanzwirtschaft, Technische Universität Braunschweig FW19V2
Abstract:In the last decade, portfolio credit risk measurement has improved significantly. The current state-of-the-art models analyze the value of the portfolio at a certain risk horizon, e.g. one year. Most popular has become the Merton-type one-factor model of Vasicek, that builds the fundament of the new capital adequacy framework (Basel II) finally adopted by the Basel Committee On Banking Supervision in June 2004. Due to this approach credit risk only arises from defaults, and the model provides an analytical solution for the risk measures Value at Risk and Expected Loss. One of the less examined questions in this field of research is, how the time to maturity of loans affects the portfolio credit risk. In practice there is common agreement that credit risk rises with the maturity of a loan, but only few solutions considering different maturities are discussed. We present two new approaches, how to cope with the problem of the maturity in the Vasicek-model. We focus on the influence of the maturity in the theoretical framework of Merton and show solutions from empirical data of four rating agencies. Our results are close to the parameters, that are used in the maturity adjustment of Basel II and may help to get a better understanding on economic capital allocation of long-term loans.
Subjects:Basel II
Capital Adequacy Requirements
Probability of Default
Default Mode Models
Maturity Adjustment
Time Horizon
JEL:G21
G28
Document Type:Working Paper
Appears in Collections:Working Paper Series, Institut für Finanzwirtschaft, TU Braunschweig

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