Modelling correlations in portfolio credit risk

Arbeitspapier

The risk of a credit portfolio depends crucially on correlations between the prob- ability of default (PD) in different economic sectors. Often, PD correlations have to be estimated from relatively short time series of default rates, and the resulting estimation error hinders the detection of a signal. We present statistical evidence that PD correlations are well described by a (one-)factorial model. We suggest a method of parameter estimation which avoids in a controlled way the underestimation of correlation risk. Empirical evidence is presented that, in the framework of the CreditRisk+ model with integrated correlations, this method leads to an increased reliability of the economic capital estimate.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Technical Report ; No. 2004,05

Classification and Topics

• Subject: Kreditrisiko ; Portfolio-Management ; Risikomanagement ; Theorie ; Korrelation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Rosenow, Bernd ; Weißbach, Rafael ; Altrock, Frank
• Event: Veröffentlichung
• (who): Universität Dortmund, Sonderforschungsbereich 475 - Komplexitätsreduktion in Multivariaten Datenstrukturen
• (where): Dortmund
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/49318
• Last update: 10.03.2025, 11:45 AM CET