Treatment of double default effects within the granularity adjustment for Basel II

S. Ebert, E. Lütkebohmert

Research output: Contribution to journalArticleScientificpeer-review

5 Citations (Scopus)

Abstract

Within the Internal Ratings-Based (IRB) approach of Basel II it is assumed that idiosyncratic risk has been fully diversi?ed away. The impact of undiversi?ed idiosyncratic risk on portfolio Value-at-Risk can be quanti?ed via a granularity adjustment (GA). We provide an analytic formula for the GA in an extended single- factor CreditRisk+ setting incorporating double default e?ects. It accounts for guarantees and their e?ect of reducing credit risk in the portfolio. Our general GA very well suits for application under Pillar 2 of Basel II as the data inputs are drawn from quantities already required for the calculation of IRB capital charges.
Original languageEnglish
Pages (from-to)3-33
JournalJournal of Credit Risk
Volume7
Issue number1
Publication statusPublished - 2011
Externally publishedYes

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