RT Journal Article
SR Electronic
T1 Annual Default Rates are Probably Less Than Long-Run Average Annual Default Rates
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 85
OP 87
DO 10.3905/jfi.2008.712352
VO 18
IS 2
A1 Nicholas M. Kiefer
YR 2008
UL https://pm-research.com/content/18/2/85.abstract
AB Banks using either the Foundation or Advanced option of the internal ratings based approach to credit risk under Basel II capital requirements must estimate long-run annual average default probabilities for buckets of homogeneous assets. The one-factor model underlying the capital calculations in Basel II has implications for the distribution of average (across assets) default rates over time. One of these implications is that the average default rate in any period is probably smaller than the overall average default rate (over time and assets). The lesson for practitioners is that the short-term default experience of new, very safe assets is likely to underpredict the true long-run default rate for these assets.TOPICS: Factor-based models, legal/regulatory/public policy, information providers/credit ratings