Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/122004
Authors: 
Lu, Meng-Jou
Chen, Cathy Yi-Hsuan
Härdle, Karl Wolfgang
Year of Publication: 
2015
Series/Report no.: 
SFB 649 Discussion Paper 2015-042
Abstract: 
A standard quantitative method to access credit risk employs a factor model based on joint multivariate normal distribution properties. By extending a one-factor Gaussian copula model to make a more accurate default forecast, this paper proposes to incorporate a state-dependent recovery rate into the conditional factor loading, and model them by sharing a unique common factor. The common factor governs the default rate and recovery rate simultaneously and creates their association implicitly. In accordance with Basel III, this paper shows that the tendency of default is more governed by systematic risk rather than idiosyncratic risk during a hectic period. Among the models considered, the one with random factor loading and a state-dependent recovery rate turns out to be the most superior on the default prediction.
Subjects: 
Factor Model
Conditional Factor Loading
State-Dependent Recovery Rate
JEL: 
C38
C53
F34
G11
G17
Document Type: 
Working Paper

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