Ratings-based credit risk modelling: An empirical analysis

Banks have recently developed new techniques for gauging the credit risk associated with portfolios of illiquid and defaultable instruments. These techniques could revolutionise banks' management of credit risk and could in the longer term serve as a more risk-sensitive basis for calculating re...

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Bibliographic Details
Published in:International review of financial analysis 2007, Vol.16 (5), p.434-451
Main Authors: Nickell, Pamela, Perraudin, William, Varotto, Simone
Format: Article
Language:English
Subjects:
Credit ratings
Credit risk
Credit risk models
Eurobonds
Regulation of financial institutions
Risk assessment
Studies
Value-at-risk
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Summary:Banks have recently developed new techniques for gauging the credit risk associated with portfolios of illiquid and defaultable instruments. These techniques could revolutionise banks' management of credit risk and could in the longer term serve as a more risk-sensitive basis for calculating regulatory capital on banks' loan books than in Basel 2, the new regulatory capital framework. In this paper we implement a popular credit risk model that exploits the information in credit ratings to determine a portfolio's value-at-risk. Using price data on large eurobond portfolios, we assess, on an out-of-sample basis, how well the model tracks the risks it is supposed to measure.
ISSN:1057-5219
1873-8079
DOI:10.1016/j.irfa.2007.06.003