Default probabilities and default correlations

Arbeitspapier

Starting from the Merton framework for firm defaults, we provide the analytics and robustness of the relationship between default correlations. We show that loans with higher default probabilities will not only have higher variances but also higher correlations between loans. As a consequence, portfolio standard deviation can increase substantially when loan default probabilities rise. This result has two important implications. First, relative prices of loans with different default probabilities should reflect the differential impact on portfolio standard deviation. Second, the standard deviation of loan portfolios and of default rates, as well as the required economic capital will vary significantly over the business cycle.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Research Notes ; No. 01-5

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
• Thema: Credit portfolio management ; Default correlations ; Pricing of loans ; Macroeconomic risk ; Credit risk models ; Kreditrisiko ; Portfolio-Management ; Optionspreistheorie ; Theorie ; Varianzanalyse ; Korrelation

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Erlenmaier, Ulrich ; Gersbach, Hans
• Ereignis: Veröffentlichung
• (wer): Deutsche Bank Research
• (wo): Frankfurt a. M.
• (wann): 2001

Weitere Informationen

• Handle: http://hdl.handle.net/10419/40256
• Letzte Aktualisierung: 10.03.2025, 11:42 MEZ