A Survey of Cyclical Effects in Credit Risk Measurement Models
66 Pages Posted: 3 Nov 2008
Date Written: May 2002
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.
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