Asset correlation for credit-risk analysis
New research from the Bank of Japan estimates and discusses asset correlations using a Merton-type factor model, based on time-series data on active and default companies in Japan by industry, size, credit rating and region.
The results are as follows:
• one common factor is not always adequate for the precise estimation of asset correlations;
• asset correlation varies across industry, size, credit rating and region groups;
• asset correlation is high for large companies and low for small
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