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Default-implied Asset Correlation: Empirical Study for Moroccan Companies

Author

Listed:
  • Mustapha Ammari

    (National School of Applied Sciences (ENSA), University Ibn Zohr, Agadir 80350, Morocco,)

  • Ghizlane Lakhnat

    (National School of Applied Sciences (ENSA), University Ibn Zohr, Agadir 80350, Morocco.)

Abstract

The asset correlation is a key regulatory parameter in the calculation of the capital charge for credit risk under the second Basel agreement. This parameter has been set in a uniform manner for all banking institutions wishing to integrate the Basel framework. However, estimation of the asset correlation has not often been discussed, even though it substantially affects the estimates of the unexpected loss. Importantly, it is essential that financial institutions use the appropriate method and data to calculate the asset correlation in order to compute the unexpected loss accurately. In this work, we developed the theoretical framework for the calculation of the default-implied asset correlation. Using the developed model, we calculated the correlation of the assets that was decreasing according to the probability of default. By comparing our model with the Basel model, we found a significant difference on the asset correlation value and the regulatory capital coefficient. This resulted in a large risk-weighted assets difference between our model and the Basel framework.

Suggested Citation

  • Mustapha Ammari & Ghizlane Lakhnat, 2017. "Default-implied Asset Correlation: Empirical Study for Moroccan Companies," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 415-425.
    • Handle: RePEc:eco:journ1:2017-02-55
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    References listed on IDEAS

    as
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    Cited by:

    1. Mustapha Ammari & Ghizlane Lakhnati, 2017. "Loss Given Default Estimating by the Conditional Minimum Value," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 779-785.

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    More about this item

    Keywords

    Default-implied Asset Correlation; Credit Risk Modeling; Asymptotic Single Risk Factor;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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