Misspecified Copulas in Credit Risk Models:How Good is Gaussian?

In addition to “classical” approaches, such as the Gaussian CreditMetrics or Basel II model, recentlythe use of other copulas has been proposed in the area of credit risk for modeling loss distributions,particularly T copulas which lead to fatter tails ceteris paribus. As an amendment to recentresearch this paper shows some estimation results when the copula in a default-mode frameworkusing a latent variable distribution is misspecified. It turns out that parameter estimates may be biased,but that the resulting forecast for the loss distribution may still be adequate. We also comparethe performance of the true and misspecified models...