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The Importance of Estimation Uncertainty in a Multi-Rating Class Loan Portfolio

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  • Dannenberg, Henry

Abstract

This article seeks to make an assessment of estimation uncertainty in a multi-rating class loan portfolio. Relationships are established between estimation uncertainty and parameters such as probability of default, intra- and inter-rating class correlation, degree of inhomogeneity, number of rating classes used, number of debtors and number of historical periods used for parameter estimations. In addition, by using an exemplary portfolio based on Moody's ratings, it becomes clear that estimation uncertainty does indeed have an effect on interest rates.

Suggested Citation

  • Dannenberg, Henry, 2011. "The Importance of Estimation Uncertainty in a Multi-Rating Class Loan Portfolio," IWH Discussion Papers 11/2011, Halle Institute for Economic Research (IWH).
    • Handle: RePEc:zbw:iwhdps:iwh-11-11
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    References listed on IDEAS

    as
    1. Peter Christoffersen & Sílvia Gonçalves, . "Estimation risk in financial risk management," Journal of Risk, Journal of Risk.
    2. Hamerle, Alfred & Knapp, Michael & Liebig, Thilo & Wildenauer, Nicole, 2005. "Incorporating prediction and estimation risk in point-in-time credit portfolio models," Discussion Paper Series 2: Banking and Financial Studies 2005,13, Deutsche Bundesbank.
    3. Philipp Sibbertsen & Gerhard Stahl & Corinna Luedtke, . "Measuring model risk," Journal of Risk Model Validation, Journal of Risk Model Validation.
    4. Kerkhof, F.L.J. & Melenberg, B. & Schumacher, J.M., 2002. "Model Risk and Regulatory Capital," Other publications TiSEM 6b857b42-548f-416f-b37f-d, Tilburg University, School of Economics and Management.
    5. Tarashev, Nikola, 2010. "Measuring portfolio credit risk correctly: Why parameter uncertainty matters," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2065-2076, September.
    6. Kerkhof, F.L.J. & Melenberg, B. & Schumacher, J.M., 2002. "Model Risk and Regulatory Capital," Other publications TiSEM 6b857b42-548f-416f-b37f-d, Tilburg University, School of Economics and Management.
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    More about this item

    Keywords

    credit portfolio risk; estimation uncertainty; bootstrapping; economic equity; Kreditrisikobewertung; Schätzunsicherheit; Bootstrapping; ökonomisches Eigenkapital;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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