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Modeling default correlation in a US retail loan portfolio

Author

Listed:
  • Magdalena Pisa
  • Dennis Bams
  • Christian Wolff

    (LSF)

Abstract

This paper generalizes the existing asymptotic single-factor model to address issues related to industry heterogeneity, default clustering and capital requirement s parameter uncertainty in US retail loan portfolios. We argue that the Basel II capital requirement overstates the riskiness of small businesses even with prudential adjustments.Moreover, our estimates show that both location and spread of loss distribution bare uncertainty.Their shifts over the course of the recent crisis have important risk management implications. The results are based on a unique representative dataset of US small businesses from 2005 to 2011 and give fundamental insights into the US economy.

Suggested Citation

  • Magdalena Pisa & Dennis Bams & Christian Wolff, 2012. "Modeling default correlation in a US retail loan portfolio," DEM Discussion Paper Series 12-19, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:12-19
    as

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    File URL: http://wwwen.uni.lu/content/download/57932/684029/file/Modeling%20default%20correlation%20in%20a%20US%20retail%20loan%20portfolio%20(19).pdf
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    Citations

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    Cited by:

    1. Mikael Juselius & Nikola Tarashev, 2022. "When uncertainty decouples expected and unexpected losses," BIS Working Papers 995, Bank for International Settlements.
    2. repec:zbw:bofrdp:2022_004 is not listed on IDEAS
    3. Wolff, Christian & Bams, Dennis & Pisa, Magdalena, 2015. "Ripple effects from industry defaults," CEPR Discussion Papers 10891, C.E.P.R. Discussion Papers.
    4. Mikael Juselius & Nikola Tarashev, 2020. "Forecasting expected and unexpected losses," BIS Working Papers 913, Bank for International Settlements.
    5. Düllmann, Klaus & Koziol, Philipp, 2013. "Evaluation of minimum capital requirements for bank loans to SMEs," Discussion Papers 22/2013, Deutsche Bundesbank.
    6. Mikael Juselius & Nikola Tarashev, 2022. "When uncertainty decouples expected and unexpected losses," BIS Working Papers 995, Bank for International Settlements.

    More about this item

    Keywords

    Retail credit risk; default correlation; multiple defaults; generalized method of moments;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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