66 Pages Posted: 11 Nov 2008
Date Written: May 2002
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-FI-02-05. Available at SSRN: https://ssrn.com/abstract=1298821