Roesch, Daniel (2005) An empirical comparison of default risk forecasts from alternative credit rating philosophies. INTERNATIONAL JOURNAL OF FORECASTING, 21 (1). pp. 37-51. ISSN 0169-2070,
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The New Basel Capital Accord will allow the determination of banks' regulatory capital requirements due to probabilities of default (PDs) which are estimated and forecasted from internal ratings. Broadly, two rating philosophies are distinguished: through the cycle versus point in time ratings. We employ a likelihood ratio backtesting of both types with respect to their probability of default forecasts and correlations derived from a nonlinear random effects panel model using data from Standard & Poor's. The implications for risk capital using these different philosophies are demonstrated. It is shown that Point in Time Ratings will exhibit much lower correlations and, thus, default probability forecasts should be more precise. As a consequence, Value-at-Risk quantiles of default distributions should be lower than those generated by Through the Cycle Ratings. Nevertheless, banks which use Point in Time Ratings may be punished in times of economic stress if the implied reduction of asset correlation is not taken into account. (C) 2004 International Institute of Forecasters. Published by Elsevier B.V. All rights reserved.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | ANATOMY; MODELS; credit rating; basel II; backtesting; risk management; credit risk modeling |
| Subjects: | 300 Social sciences > 330 Economics |
| Divisions: | Business, Economics and Information Systems > Institut für Betriebswirtschaftslehre > Lehrstuhl für Statistik und Risikomanagement (Prof. Dr. Rösch) |
| Depositing User: | Dr. Gernot Deinzer |
| Date Deposited: | 02 Jun 2021 13:37 |
| Last Modified: | 02 Jun 2021 13:37 |
| URI: | https://pred.uni-regensburg.de/id/eprint/36714 |
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