A Survey of Cyclical Effects in Credit Risk Measurement Models

66 Pages Posted: 3 Nov 2008

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Anthony Saunders

New York University - Leonard N. Stern School of Business

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Date Written: May 2002

Abstract

We survey both academic and proprietary models to examine how macroeconomic andsystematic risk effects are incorporated into measures of credit risk exposure. Manymodels consider the correlation between the probability of default (PD) and cyclicalfactors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.

Suggested Citation

Allen, Linda and Saunders, Anthony, A Survey of Cyclical Effects in Credit Risk Measurement Models (May 2002). NYU Working Paper No. FIN-02-018. Available at SSRN: https://ssrn.com/abstract=1294196

Linda Allen (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

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HOME PAGE: http://stern.nyu.edu/~lallen

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

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New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

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