hard · Corporate Credit Analysis

In the context of the Basel IRB capital formula, how does asset correlation (ρ) typically behave as the Probability of Default (PD) of a corporate exposure increases?

1. It decreases, reflecting higher idiosyncratic risk for lower-quality credits.
2. It fluctuates based on the current level of interest rates.
3. It remains constant at 0.15 for all corporate exposures.
4. It increases, as all distressed firms tend to fail together in a recession.

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