A Survey of Cyclical Effects in Credit Risk Measurement Models

BIS Working Paper No. 126

NYU Stern School of Business, Finance Working Paper No. FIN-02-018

43 Pages Posted: 13 Dec 2005

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

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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.

Keywords: macroeconomic, systematic risk effects, credit risk exposure, PD, LDG

Suggested Citation

Allen, Linda and Saunders, Anthony, A Survey of Cyclical Effects in Credit Risk Measurement Models. BIS Working Paper No. 126; NYU Stern School of Business, Finance Working Paper No. FIN-02-018. Available at SSRN: https://ssrn.com/abstract=315561 or http://dx.doi.org/10.2139/ssrn.315561

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

Anthony Saunders (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

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