Abstract
The capital requirements formula within the Basel II Accord is based on a Merton one-factor model and in the case of credit cards an asset correlation of 4% is assumed. In this article we estimate the asset correlation for two datasets assuming the one-factor model. We find that the asset correlations assumed by Basel II are much higher than those observed in the datasets we analyse. We show the reduction in capital requirements that a typical lender would have if the values we estimated were implemented in the Basel Accord in place of the current values.
| Original language | English |
|---|---|
| Pages (from-to) | 87-95 |
| Number of pages | 9 |
| Journal | Applied Financial Economics |
| Volume | 22 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - Jan 2012 |
| Externally published | Yes |
UN SDGs
This output contributes to the following UN Sustainable Development Goals (SDGs)
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SDG 10 Reduced Inequalities
Free Keywords
- Asset correlation
- Basel II
- Credit cards
- Default
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
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