Basel II correlation estimates in light of empirical evidence and literature

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dc.contributor Aalto-yliopisto fi
dc.contributor Aalto University en Vänttinen, Aleksi 2014-08-06T08:38:14Z 2014-08-06T08:38:14Z 2014
dc.description.abstract Basel II rules put forward by Basel Committee on Banking Supervision introduced a more risk-sensitive approach to banks to calculate regulatory capital requirements. This more risk-sensitive framework includes an option for banks to apply for permission to use Internal-ratings based approach in which the bank can estimate some parameters by itself without resulting to supervisory estimates. The framework for calculating the capital requirement for exposures in corporate portfolio includes a correlation function in which the bank's own estimate of probability of default would be the only variable. However, the correlation function used in Basel's internal ratings-based approach is not based on a strong theoretical foundation but instead relies on few simple assumptions according to which the function was formed and the calibration was done and later revised. The paper aims to analyze some of the limitations the function induces to the framework by first going through the existing critique in the literature and then calculating asset correlations implied by loss distributions of different industries and sectors and drawing from sensitivity analysis of risk-weighted assets and loan margin. The resulting asset value correlations calculated from the empirical dataset in this paper are close to what previous studies on default data have found to be the empirical level. The dataset is based on the ratio of gross impairment to loans and guarantees. Furthermore the feasibility of the results is assessed through three hypotheses which all assist in showing the feasibility of the chosen approach. The results show that asset value correlations and both expected and unexpected losses are different among industries. en
dc.format.extent 68
dc.language.iso en en
dc.title Basel II correlation estimates in light of empirical evidence and literature en
dc.type G2 Pro gradu, diplomityö fi Kauppakorkeakoulu fi School of Business en
dc.contributor.department Rahoituksen laitos fi
dc.contributor.department Department of Finance en
dc.subject.keyword Basel
dc.subject.keyword asset value correlation
dc.subject.keyword Internal-ratings based approach
dc.identifier.urn URN:NBN:fi:aalto-201408062308
dc.type.dcmitype text en
dc.programme.major Finance en
dc.programme.major Rahoitus fi
dc.type.ontasot Master's thesis en
dc.type.ontasot Pro gradu tutkielma fi
dc.subject.helecon rahoitus
dc.subject.helecon financing
dc.subject.helecon rahoitusmarkkinat
dc.subject.helecon financial markets
dc.subject.helecon pankit
dc.subject.helecon banks
dc.subject.helecon luotto
dc.subject.helecon credit
dc.subject.helecon valvonta
dc.subject.helecon control
dc.subject.helecon riskienhallinta
dc.subject.helecon risk management
dc.ethesisid 13603 2014-07-02
dc.location P1 I fi

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