The application of Bayesian method to the distribution of asset return correlation in the New Basel Accord

• Main Authors: CHAO,JO-YAO, 趙若堯
• Other Authors: LYINN CHUNG
• Format: Others
• Language: zh-TW
• Published: 2006
• Online Access: http://ndltd.ncl.edu.tw/handle/79815109651699893905

碩士 === 國立臺北大學 === 統計學系 === 94 === The asset return correlation is the key variable for calculating the regulatory capital in the New Basel Accord. The Second Consultative paper（CP2）in 2001 considered the asset return correlation as a constant 0.2. The third Consultative paper（CP3）announced in April, 2003 formally introduced the asset return correlation as a decreasing function of default probability. It not only defined that the range of asset return correlation is 0.12 to 0.24 for corporations but also addressed that asset return correlation and probability of default are negatively correlated. However, as CP3 did not explain the theoretical concept for the formula of asset return correlation, there were many research papers discussing the appropriateness of this formula from different aspects. This study applied Bayesian method to a single risk factor model in order to discuss the probability distribution of asset return correlation. We use the data for the listed companies of North America in 2004 from CRSP to derive the distribution of asset return correlation. The empirical results reveal that the range of asset return correlation is not as wide (0.12,0.24) for corporations. And the range of asset return correlation varies for different financial statuses of corporations. Since we found the inappropriateness of the formula for asset return correlation in the New Basel Accord, some suggestions and modifications to this formula are proposed for Basel Committee in this study.