FIN-02-018

A Survey of Cyclical Effects in Credit Risk Measurement Models

May 2002

Linda Allen and Anthony Saunders

ABSTRACT

We survey both academic and proprietary models to examine how macroeconomic and systematic risk effects are incorporated into measures of credit risk exposure. Many models consider the correlation between the probability of default (PD) and cyclical factors. Few models adjust loss rates (loss given default) to reflect cyclical effects. We find that the possibility of systematic correlation between PD and LGD is also neglected in currently available models.

Linda Allen
Institution: Zicklin School of Business, Baruch College 17 Lexington Avenue, Box 10-225, New York, NY 10010.
Email: Linda_Allen@baruch.cuny.edu

Anthony Saunders
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Email: asaunder@stern.nyu.edu
Telephone: (212) 998-0711
Homepage: http://www.stern.nyu.edu/~asaunder/


To download a copy of this paper click here
To request a copy of this paper click here

The Department of Finance Working Paper Series has been generously sponsored by