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SSRN Electronic Journal
Article . 2001 . Peer-reviewed
Data sources: Crossref
EconStor
Research . 2001
Data sources: EconStor
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Default Probabilities and Default Correlations

Authors: Erlenmaier, Ulrich; Gersbach, Hans;

Default Probabilities and Default Correlations

Abstract

Starting from the Merton framework for firm defaults, we provide the analytics and robustness of the relationship between default correlations. We show that loans with higher default probabilities will not only have higher variances but also higher correlations between loans. As a consequence, portfolio standard deviation can increase substantially when loan default probabilities rise. This result has two important implications. First, relative prices of loans with different default probabilities should reflect the differential impact on portfolio standard deviation. Second, the standard deviation of loan portfolios and of default rates, as well as the required economic capital will vary significantly over the business cycle.

Keywords

Credit portfolio management, Portfolio-Management, Pricing of loans, ddc:330, Kreditrisiko, Macroeconomic risk, Optionspreistheorie, G31, Credit portfolio management,Default correlations,Pricing of loans,Macroeconomic risk,Credit risk models, G21, Varianzanalyse, G11, G12, Credit risk models, Korrelation, Theorie, Default correlations, jel: jel:G31, jel: jel:G12, jel: jel:G21, jel: jel:G11

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    influence
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selected citations
These citations are derived from selected sources.
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
10
Average
Top 10%
Average
bronze