A Survey of Cyclical Effects in Credit Risk Measurement Models
NYU Stern School of Business, Finance Working Paper No. FIN-02-018
43 Pages Posted: 13 Dec 2005
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
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