European Financial and Accounting Journal 2011, 6(4):20-48 | DOI: 10.18267/j.efaj.18

Exposure at Default Modeling with Default Intensities

Jiří Witzany
Doc. RNDr. Jiří Witzany, Ph.D. - assistant professor; Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics Prague, W. Churchill sq. 4, 130 67 Prague, Czech Republic; <jiri.witzany@vse.cz>.

The paper provides an overview of the Exposure at Default (EAD) definition, requirements, and estimation methods as set by the Basel II regulation. A new methodology connected to the intensity of default modeling is proposed. The numerical examples show that various estimation techniques may lead to quite different results with intensity of default based model being recommended as the most faithful with respect to a precise probabilistic definition of the EAD parameter.

Keywords: Credit risk, Regulatory capital, Exposure at default, Default intensity
JEL classification: C14, G21, G28

Published: December 1, 2011  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Witzany, J. (2011). Exposure at Default Modeling with Default Intensities. European Financial and Accounting Journal, 6(4), 20-48. doi: 10.18267/j.efaj.18
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Araten, M. - Jacobs, M. (2001): Loan Equivalents for Revolving Credits and Advised Lines. RMA Journal, vol. 83, no. 8, pp. 34-39.
    2. BCBS (2005): Guidance on Paragraph 468 of the Framework Document. [on-line], Basel, Basel Committee on Banking Supervision, c2005, [cit. 16. 6. 2011], <http://www.bis.org/publ/bcbs115.pdf>.
    3. BCBS (2006): International Convergence of Capital Measurement and Capital Standards. A Revised Framework. Comprehensive Version. [on-line], Basel, Basel Committee on Banking Supervision, c2006, [cit. 16. 6. 2011], <http://www.bis.org/publ/bcbs128.pdf>.
    4. BCBS (2004): Studies on the Validation of Internal Rating Systems. [on-line], Basel, Basel Committee on Banking Supervision, c2004, [cit. 16. 6. 2011], <http://www.bis.org/publ/bcbs_wp14.htm>.
    5. CEBS (2006): Guidelines on the Implementation, Validation and Assessment of Advanced Measurement (AMA) and Internal Rating Based (IRB) Approaches, CP 10 Revised. [on-line], London, Committee of European Banking Supervisors, c2006, [cit. 16. 6. 2011], <http://www.eba.europa.eu/getdoc/5b3ff026-4232-4644-b593-d652fa6ed1ec/GL10.aspx>.
    6. EC (2006). Directive 2006/48/EC of the European Parliament and the Council of 14 June 2006 Relating to the Taking up and Pursuit of the Business of Credit Institutions (Recast). [on-line], Brussels, European Commission, c2006, [cit. 16. 6. 2011], <http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:177:0001:0001:EN:PDF >.
    7. Jacobs, M. (2008): An Empirical Study of Exposure at Default. [on-line], Washington, D. C., The Office of the Comptroller of the Currency Credit Risk Analysis Division, c2008, [cit. 16. 6. 2011], <http://michaeljacobsjr.com/Jacobs_AnEmpiricalStudyOfExposureAtDefault_11-08_V2.pdf >.
    8. Moral, G. (2006): EAD Estimates for Facilities with Explicit Limits. In: Engelman, B. - Rauhmeier, R. (eds.): The Basel II Risk Parameters: Estimation, Validation, and Stress Testing. Berlin, Springer, 2006, s. 197-242. Go to original source...
    9. Smithson, M. - Verkuilen, J. (2005): Beta Regression: Practical Issues in Estimation. [on-line], Canberra, Australian National University, c2005, [cit. 16. 6. 2011], <http://psychology3.anu.edu.au/people/smithson/details/betareg/Read me.pdf>.

    This is an open access article distributed under the terms of the Creative Commons Attribution 4.0 International License (CC BY 4.0), which permits use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content