A Survey of Cyclical Effects in Credit Risk Measurement Models

Allen, Linda; Saunders, Anthony

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A Survey of Cyclical Effects in Credit Risk Measurement Models

NYU Working Paper No. S-CDM-02-04

66 Pages Posted: 5 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

There are 4 versions of this paper

Date Written: May 2002

Abstract

We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors. 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: Suggested Citation

Allen, Linda and Saunders, Anthony, A Survey of Cyclical Effects in Credit Risk Measurement Models (May 2002). NYU Working Paper No. S-CDM-02-04, Available at SSRN: https://ssrn.com/abstract=1295817