Maximum Likelihood Estimate of Default Correlations
Risk Magazine, November 2004.
5 Pages Posted: 27 Nov 2007
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: Suggested Citation