Parameterizing Credit Risk Models

36 Pages Posted: 13 May 2004 Last revised: 21 Feb 2009

See all articles by Alfred Hamerle

Alfred Hamerle

University of Regensburg - Faculty of Business, Economics & Information Systems

Daniel Roesch

University of Regensburg

Abstract

Approaches for modeling and estimating individual credit risk have been considerably improved during the last years, and latterly practitioners and researchers in the banking industry increasingly focus on quantification of portfolio credit risk. The main problem of this task is the lack of adequate time series of default data. Therefore there is little empirical evidence on the relevant input parameters for the various credit risk modeling approaches. As a consequence, calculations of economic capital may yield very different results and internal models will not be envisaged for the determination of regulatory capital requirements. The present contribution firstly presents three popular portfolio credit risk models and shows how they can be comparably parameterized using a likelihood framework. Then the respective input parameters of all three models are estimated from a large database using a time-series of German corporate bankruptcies. Several restrictions on the available information set are introduced and compared. At last we analyze the forecasted loss distributions generated by each model. We find that the differences of the outcomes are very small when our empirical estimates are used. Hence, model risk may be considerably reduced.

Keywords: Credit Risk Models, Default Correlations, Basel II

JEL Classification: G20, G28, C51

Suggested Citation

Hamerle, Alfred and Roesch, Daniel, Parameterizing Credit Risk Models. Journal of Credit Risk, Vol. 2, No. 4, 2006, Available at SSRN: https://ssrn.com/abstract=500304 or http://dx.doi.org/10.2139/ssrn.500304

Alfred Hamerle

University of Regensburg - Faculty of Business, Economics & Information Systems ( email )

Universitstrasse 31
Regensberg D-93053
Germany

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/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
991
Abstract Views
3,282
rank
24,726
PlumX Metrics