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Multi-period defaults and maturity effects on economic capital in a ratings-based default-mode model
[working paper]
Corporate Editor
Technische Universität Braunschweig, Department Wirtschaftswissenschaften, Institut für Finanzwirtschaft
Abstract
"In the last decade, portfolio credit risk measurement has improved significantly. The current state-of-the-art models analyze the value of the portfolio at a certain risk horizon, e.g. one year. Most popular has become the Merton-type one-factor model of Vasicek, that builds the fundament of the ne... view more
"In the last decade, portfolio credit risk measurement has improved significantly. The current state-of-the-art models analyze the value of the portfolio at a certain risk horizon, e.g. one year. Most popular has become the Merton-type one-factor model of Vasicek, that builds the fundament of the new capital adequacy framework (Basel II) finally adopted by the Basel Committee On Banking Supervision in June 2004. Due to this approach credit risk only arises from defaults, and the model provides an analytical solution for the risk measures Value at Risk and Expected Loss. One of the less examined questions in this field of research is, how the time to maturity of loans affects the portfolio credit risk. In practice there is common agreement that credit risk rises with the maturity of a loan, but only few solutions considering different maturities are discussed. We present two new approaches, how to cope with the problem of the maturity in the Vasicek-model. We focus on the influence of the maturity in the theoretical framework of Merton and show solutions from empirical data of four rating agencies. Our results are close to the parameters, that are used in the maturity adjustment of Basel II and may help to get a better understanding on economic capital allocation of long-term loans." (author's abstract)... view less
Keywords
capital; risk; analysis; credit; portfolio management; security; equity
Classification
Economic Policy
Document language
English
Publication Year
2005
City
Braunschweig
Page/Pages
48 p.
Series
IF Working Paper Series, FW19V2
Status
reviewed
Licence
Deposit Licence - No Redistribution, No Modifications
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