Credit Risk

BIS Working Papers No 280 Measuring portfolio credit attempt correctly: why parameter incredulity matters by Nikola A. Tarashev monetary and Economic Department April 2009 JEL classification: G20, G32, C11. Keywords: jibe defaults; Estimation misplay; chance counselling. BIS Working Papers are written by members of the Monetary and Economic Department of the vernacular for supranational Settlements, and from while to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not needfully the views of the BIS. Copies of topics are available from: Bank for International Settlements campaign & Communications CH-4002 Basel, Switzerland electronic mail: publications@bis.org Fax: +41 61 280 9100 and +41 61 280 8100 This publication is available on the BIS website (HTHT0HUwww.bis.orgUHT). © Bank for International Se ttlements 2009. All rights reserved. drawing excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISBN 1682-7678 (online) Measuring Portfolio Credit Risk Correctly: wherefore Parameter Uncertainty Matters? Nikola A.

Tarashev† April 3, 2009 Abstract Why should take chances management systems account for parameter uncertainty? In order to sequent this question, this paper lets an investor in a credit portfolio face non-diversifiable estimation-driven uncertainty near two parameters: probability of default and asset-return correlation. Bayesian inference revea ls that for realistic assumptions about th! e portfolios credit quality and the info underlying parameter estimates this uncertainty comfortably increases the tail risk perceived by the investor. Since incorporating parameter uncertainty in a measure of tail risk is computationally demanding, the paper even derives and analyzes a closed-form approximation to such a measure. JEL Classification: G20, G32, C11...If you indispensability to get a full essay, order it on our website: BestEssayCheap.com

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