Basel II implementation : a guide to developing and by Peter Miu

By Peter Miu

  • Basel II is an international rules, and monetary associations needs to turn out minimal compliance via 2008
  • The authors are hugely sought-after audio system and one of the world’s so much famous professionals on Basel II implementation
  • Accompanying CD-ROM contains spreadsheet templates that may help agencies as they enforce Basel II

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Additional info for Basel II implementation : a guide to developing and validating a compliant, internal risk rating system

Example text

It serves as our point estimate of the risk premium for that particular segment. 5) where N is the number of defaulted instruments in that segment. A by-product of the above algorithm is the minimum sum of the squares of εi (SSE) normalized by the square root of the time-to-recovery. , LGD Basel II Implementation 34 risk) of that specific segment. An appropriate risk-return trade-off should therefore suggests that the larger the estimated excess return (rˆx), the larger the corresponding SSE. 5 is in fact the maximum likelihood estimate.

5 is in fact the maximum likelihood estimate. 6) where L is the log-likelihood function and φ (•) is the probability density of the standard normal distribution. 5 ⎛ d2 L ⎞ ␴ rˆx = ⎜ − 2 ⎟ . 7) We can therefore establish confidence interval around our point estimate of risk premium. 6449 × ␴ rˆx . 30 Suppose there are a total of mi recovery cash flows (Ri,1, Ri,2, …, Ri,j, …, Ri,mi ), which are realized at times tRi,1, tRi,2, . . , tRi,j , . . and tRi,m , respectively, for defaulted instrument i.

1%. We therefore cannot rule out the possibility that the true risk premium of this type of instrument may actually be positive. Our hope is that in an environment where we observe many ad hoc estimations in practice, our results provide another reference point for the practitioners. Our results also suggest a strong case for applying different risk premium to different defaulted instruments. 6 Basel II Implementation 26 The following further summarizes the results: 1. Our results suggest that whether the instrument is investment grade (IG) or noninvestment grade (NIG), whether or not it defaults during an industry-specific stress period, and its instrument type are important determinants of recovery risk and thus the discount rate risk premium.

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