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 language | English |
|---|---|
| Pages (from-to) | 3-33 |
| Journal | Journal of Credit Risk |
| Volume | 7 |
| Issue number | 1 |
| Publication status | Published - 2011 |
| Externally published | Yes |
