A Conditional Probability of Default Under the Influence of Both Systematic and Idiosyncratic Components

International Journal of Economics and Management Studies

© 2020 by SSRG - IJEMS Journal

Volume 7 Issue 12

Year of Publication : 2020

Authors : Camilo Sarmiento

10.14445/23939125/IJEMS-V7I12P106

How to Cite?

Camilo Sarmiento, "A Conditional Probability of Default Under the Influence of Both Systematic and Idiosyncratic Components," SSRG International Journal of Economics and Management Studies, vol. 7,  no. 12, pp. 43-46, 2020. Crossref, https://doi.org/10.14445/23939125/IJEMS-V7I12P106

Abstract:

In this article, we relax the assumption of a fully granular portfolio underpinning the Basel II risk weights for credit risk in determining capital requirements. To do so, we model losses under an adverse scenario that stems from both the systematic and idiosyncratic components. The generalization requires the use of a numerically derived distribution function via simulation. Unlike previous work, our method is sufficiently flexible to accommodate a fattailed distribution in the idiosyncratic component. The idiosyncratic component is pertinent for a non-granular portfolio

Keywords:

Probability of Default, Adverse Scenario, Systematic, Idiosyncratic.

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