Benchmarking asset correlations

Basel II stipulates that the asset correlation to be used in calibration of obligor risk weights is 20%. 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, and suggest that the parameter could be made adjustable as a result

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