Benchmarking asset correlations
Basel II stipulates that the asset correlation to be used in calibration of obligor risk weights is20%. Here, Alfred Hamerle, Thilo Liebig and Daniel Rösch use a parametric model to empirically obtain asset correlations from a large database of historical defaults. They find the observed correlation to be an order of magnitude less than the Basel assumption, andsuggest that the parameter could be made adjustable as a result.
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