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Hacked AIRB Black Box

Osadchiy, Maksim and Sidorov, Alexander (2020): Hacked AIRB Black Box.

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A loss distribution of a credit portfolio in framework of AIRB is determines as a product of Vasicek distribution function by an adjustment coefficient, which allows for the Loss Given Default as an exogenous parameter LGD and the maturity of obligations T. This coefficient depends also on probability of default (PD) in non-obvious way, which does not explained in Basel documentation. It is not clear also what is the scope of validity of this formula, though the form of this adjustment allows to suspect that it is approximation of another formula, which id more and more complicated. In essence, the AIRB adjustment is a kind of the “black box.” Authors tried to hack this black box using the generalized Vasicek approach. Unlike the Vasicek model describing only the distribution of defaults, the obtained in this paper Vasicek-Merton model describes the loss distribution and it seems that the AIRB model is just an approximation of the Vasicek-Merton model.

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