A survey of cyclical effects in credit risk measurement model

Authors:
  • LALinda Allen
    Linda Allen
  • ASAnthony Saunders
    Anthony Saunders

  • 1 January 2003
Abstract
We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.
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