Asset correlations and credit portfolio risk: an empirical analysis

Asset correlations and credit portfolio risk – an empirical analysis

In credit risk modelling, the correlation of unobservable asset returns is a crucial component for the measurement of portfolio risk. In this paper, we estimate asset correlations from monthly time series of Moody’s KMV asset values for around 2,000 European firms from 1996 to 2004. We compare correlation and value-atrisk (VaR) estimates in a one–factor or market model and a multi-factor or sec...

Default Correlations and Large-Portfolio Credit Analysis∗

A factor model for short-term probabilities of default and other corporate exits is proposed for generating default correlations while permitting missing data. The factor model can then be used to produce portfolio credit risk profiles (default-rate and portfolio-loss distributions) by complementing an existing credit portfolio aggregation method with a novel simulationconvolution algorithm. We...

Asset Correlation , Realized Default Correlation , and Portfolio Credit Risk

Asset correlation is a critical driver in modeling portfolio credit risk. Despite its importance, there have been few studies on the empirical relationship between asset correlation and subsequently realized default correlation, and portfolio credit risk. This three three-way relationship is the focus of our study using U.S. public firm default data from 1981 to 2006. We find the magnitude of d...

Cyclical correlations, credit contagion, and portfolio losses

We model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes. Cyclical correlation is due to the dependence of firms on common economic factors. Contagion is associated with the local interaction of firms with their business partners. We provide an explicit normal approximati...

Portfolio Credit Risk