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This paper focuses on the asymptotic single-risk-factor (ASRF) model in order to analyze the impact of specification and calibration errors on popular measures of portfolio credit risk. Violations of key assumptions of this model are found to be virtually inconsequential, especially for large, welldiversified portfolios. By contrast, flaws in the calibrated interdependence of credit risk across exposures, caused by plausible small-sample estimation errors or rule-of-thumb values of asset return correlations, can lead to significant inaccuracies in measures of portfolio credit risk. Similar inaccuracies arise under standard assumptions regarding the tails of the distribution of asset returns. JEL Codes: G21, G28, G13, C15. We are indebted to Michael Gordy and Kostas Tsatsaronis for their encouragement and useful comments on an earlier version of this paper. We thank Klaus Düllmann, Wenying Jiangli, and participants at a BIS workshop, the 3rd International Conference on Credit and Operational Risk at HEC Montréal, and the 17th Annual Derivatives Securities and Risk Management Conference at the FDIC for insightful suggestions. We are also grateful to Marcus Jellinghaus for his valuable help with the data. The views expressed in this paper are our own and do not necessarily represent those of the Bank for International Settlements.
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