Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83318
Authors: 
Witzany, Jiří
Year of Publication: 
2013
Series/Report no.: 
IES Working Paper 03/2013
Abstract: 
The paper analyzes a two-factor credit risk model allowing to capture default and recovery rate variation, their mutual correlation, and dependence on various explanatory variables. At the same time, it allows computing analytically the unexpected credit loss. We propose and empirically implement estimation of the model based on aggregate and exposure level Moody's default and recovery data. The results confirm existence of significantly positive default and recovery rate correlation. We empirically compare the unexpected loss estimates based on the reduced two-factor model with Monte Carlo simulation results, and with the current regulatory formula outputs. The results show a very good performance of the proposed analytical formula which could feasibly replace the current regulatory formula.
Subjects: 
credit risk
Basel II regulation
default rates
recovery rates
correlation
JEL: 
G20
G28
C51
Document Type: 
Working Paper
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