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Small-Sample Estimation of Models of Portfolio Credit Risk

In: Recent Advances In Financial Engineering 2009

Author

Listed:
  • Michael B. Gordy

    (Federal Reserve Board, Washington, DC 20551, USA)

  • Erik Heitfield

    (Federal Reserve Board, Washington, DC 20551, USA)

Abstract

This paper explores the small sample properties of the most commonly used estimators of ratings-based portfolio credit models. We consider both method of moments and maximum likelihood estimators, and show that unrestricted estimators are subject to large biases in realistic sample sizes. We demonstrate large potential gains in precision and bias-reduction from imposing parametric restrictions across rating buckets. The restrictions we consider are based on economically meaningful hypotheses on the structure of systematic risk.

Suggested Citation

  • Michael B. Gordy & Erik Heitfield, 2010. "Small-Sample Estimation of Models of Portfolio Credit Risk," World Scientific Book Chapters, in: Masaaki Kijima & Chiaki Hara & Keiichi Tanaka & Yukio Muromachi (ed.), Recent Advances In Financial Engineering 2009, chapter 2, pages 43-63, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814304078_0002
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    Citations

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    Cited by:

    1. Christoph Wunderer, 2017. "Asset correlation estimation for inhomogeneous exposure pools," Papers 1701.02028, arXiv.org, revised Sep 2019.
    2. Henry Penikas, 2023. "IRB Asset and Default Correlation: Rationale for the Macroprudential Mark-Ups to the IRB Risk-Weights," Risk Management, Palgrave Macmillan, vol. 25(1), pages 1-27, March.
    3. Lee, Yongwoong & Rösch, Daniel & Scheule, Harald, 2021. "Systematic credit risk in securitised mortgage portfolios," Journal of Banking & Finance, Elsevier, vol. 122(C).
    4. Daniel Rösch & Harald Scheule, 2014. "Forecasting Mortgage Securitization Risk Under Systematic Risk and Parameter Uncertainty," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(3), pages 563-586, September.
    5. Claußen, Arndt & Rösch, Daniel & Schmelzle, Martin, 2019. "Hedging parameter risk," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 111-121.
    6. M. Dietsch & K. Düllmann & H. Fraisse & P. Koziol & C. Ott, 2016. "Support for the SME Supporting Factor - Multi-country empirical evidence on systematic risk factor for SME loans," Débats économiques et financiers 23, Banque de France.

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