Improved Modeling of Double Default Effects in Basel Ii - an Endogenous Asset Drop Model without Additional Correlation
نویسندگان
چکیده
In 2005 the Internal Ratings Based (IRB) approach of ‘Basel II’ was enhanced by a ‘treatment of double default effects’ to account for credit risk mitigation techniques such as ordinary guarantees or credit derivatives. This paper reveals several severe problems of this approach and presents a new method to account for double default effects. This new asset drop technique can be applied within any structural model of portfolio credit risk. When formulated within the IRB approach of Basel II, it is very well suited for practical application as it does not pose extensive data requirements and economic capital can still be computed analytically.
منابع مشابه
Asset Correlation , Realized Default Correlation , and Portfolio Credit Risk
Asset correlation is a critical driver in modeling portfolio credit risk. Despite its importance, there have been few studies on the empirical relationship between asset correlation and subsequently realized default correlation, and portfolio credit risk. This three three-way relationship is the focus of our study using U.S. public firm default data from 1981 to 2006. We find the magnitude of d...
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