A Survey of Cyclical Effects in Credit Risk Measurement Models
City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance
New York University - Leonard N. Stern School of Business
NYU Working Paper No. S-FI-02-05
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.
Number of Pages in PDF File: 66
Date posted: November 11, 2008