Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/19746 
Year of Publication: 
2005
Series/Report no.: 
Discussion Paper Series 2 No. 2005,13
Publisher: 
Deutsche Bundesbank, Frankfurt a. M.
Abstract: 
In this paper we focus on the analysis of the effect of prediction and estimation risk on the loss distribution, risk measures and economic capital. When variables for the determination of probability of default and loss distribution have to be predicted because they are not available at the time the prediction is made, the prediction is prone to errors. The model parameters for the estimation of probability of default or asset correlation are not available, and usually have to be estimated using historical data. The incorporation of prediction and estimation risk generally leads to broader loss distributions and therefore to rising values of risk parameters such as Value at Risk or Expected Shortfall. The level of economic capital required may be strongly underestimated if prediction and estimation risk are ignored.
Subjects: 
probability of default
PD
credit risk
default correlation
asset correlation
point in time
value at risk
estimation risk
JEL: 
G21
C1
Document Type: 
Working Paper

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