Credit Risk

BIS Working Papers
No 280
Measuring portfolio credit
risk correctly: why parameter
uncertainty matters
by Nikola A. Tarashev
Monetary and Economic Department
April 2009
JEL classification: G20, G32, C11.
Keywords: jibe defaults; Estimation error; chance
management.
BIS Working Papers are written by members of the Monetary and Economic Department of
the Bank for supranational Settlements, and from time to time by other economists, and are
published by the Bank. The papers are on subjects of topical interest and are technical in
character. The views expressed in them are those of their authors and not needfully the
views of the BIS.
Copies of topics are available from:
Bank for International Settlements
Press & Communications
CH-4002 Basel, Switzerland
electronic mail: publications@bis.org
Fax: +41 61 280 9100 and +41 61 280 8100
This publication is available on the BIS website (HTHT0HUwww.bis.orgUHT).
© Bank for International Settlements 2009. All rights reserved. drawing excerpts may be
reproduced or translated provided the source is stated.
ISSN 1020-0959 (print)
ISBN 1682-7678 (online)
Measuring Portfolio Credit Risk Correctly:
Why Parameter Uncertainty Matters?
Nikola A.



Tarashev†
April 3, 2009
Abstract
Why should risk management systems account for parameter uncertainty? In
order to resultant this question, this paper lets an investor in a credit portfolio face
non-diversifiable estimation-driven uncertainty near two parameters: probability
of default and asset-return correlation. Bayesian inference reveals that â€" for realistic
assumptions about the portfolios credit quality and the data underlying parameter
estimates â€" this uncertainty comfortably increases the tail risk perceived by
the investor. Since incorporating parameter uncertainty in a measure of tail risk
is computationally demanding, the paper withal derives and analyzes a closed-form
approximation to such a measure.
JEL Classification: G20, G32, C11...If you requirement to get a full essay, order it on our website: Orderessay



If you want to get a full essay, wisit our page: write my essay .