Credit risk measures and the estimation error in the ASRF model under the Basel II IRB approach

Abstract

This project aims to investigate the impact of estimating the probability of default, due to its unknown true value, to estimate the Value-al-Risk under the ASRF model. To accomplish this, a Monte Carlo simulation approach is employed to estimate de default ratio based on predetermined ”real” probabilities of default. By simulating different scenarios, we can assess the potential bias and evaluate the need for adjustments, such as confidence level modifications or the inclusion of a Margin of Conservatism (MoC), to account for estimation uncertainty.