Forecasting Probabilities of Default and Loss Rates Given Default in the Presence of Selection

Journal of the Operational Research Society 65, 2014, 393-407

51 Pages Posted: 10 Nov 2013 Last revised: 19 Nov 2015

See all articles by Daniel Roesch

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: May 18, 2012

Abstract

This paper offers a joint estimation approach for forecasting probabilities of default and loss rates given default in the presence of selection. The approach accommodates fixed and random risk factors. An empirical analysis identifies bond ratings, borrower characteristics and macroeconomic information as important risk factors. A portfolio-level analysis finds evidence that common risk measurement approaches may underestimate bank capital by up to 17 per cent relative to the presented model.

Keywords: Asset Value, Correlation, Credit Portfolio, Loss Given Default, Merton Model, Probability of Default, Recovery, Tobit Model, Volatility

JEL Classification: G20, G28, C51

Suggested Citation

Roesch, Daniel and Scheule, Harald, Forecasting Probabilities of Default and Loss Rates Given Default in the Presence of Selection (May 18, 2012). Journal of the Operational Research Society 65, 2014, 393-407, Available at SSRN: https://ssrn.com/abstract=2349019

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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