Maximum Likelihood Estimate of Default Correlations

Risk Magazine, November 2004.

5 Pages Posted: 27 Nov 2007

See all articles by Paul Demey

Paul Demey

Lyxor Asset Management

Jean-Frédéric Jouanin

affiliation not provided to SSRN

Céline Roget

Credit Lyonnais Asset Management

Thierry Roncalli

Amundi Asset Management; University of Evry

Abstract

Estimating asset correlations is difficult in practice since there is little available data and many parameters have to be found. Paul Demey, Jean-Frédéric Jouanin, Céline Roget and Thierry Roncalli present a tractable version of the multi-factor Merton model in which firms are sorted into homogeneous risk classes. They derive a simplified maximum likelihood approach that provides estimates in a reasonable computational time. As an application of this methodology, industrial sector correlations are estimated from S&P's data.

Keywords: default correlations, factor models

JEL Classification: G00

Suggested Citation

Demey, Paul and Jouanin, Jean-Frédéric and Roget, Céline and Roncalli, Thierry, Maximum Likelihood Estimate of Default Correlations. Risk Magazine, November 2004., Available at SSRN: https://ssrn.com/abstract=1032590

Paul Demey

Lyxor Asset Management ( email )

Paris
France

Jean-Frédéric Jouanin

affiliation not provided to SSRN ( email )

No Address Available

Céline Roget

Credit Lyonnais Asset Management ( email )

75002 Paris
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

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