Estimating Credit Contagion in a Standard Factor Model

Abstract

State-of-the-art credit risk portfolio models and the new Basel capital Accord consider only symmetric dependencies between borrowers in a portfolio, such as correlations. Recently, asymmetric dependencies have been introduced by Davis & Lo (2001), among others. However, statistical estimation techniques and empirical evidence on contagion are still scarce. Daniel Rosch and Birker Winterfeldt provide a simple credit risk Portfolio model extension to credit contagion and show how its parameters can be easily estimated and tested.

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