Asset correlation for credit risk analysis
-- Empirical study of default data for Japanese companies --
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This paper 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. First, one common factor is not always adequate for the precise estimation of asset correlations. Second, asset correlation varies across industry, size, credit rating and region groups. Third, asset correlation is high for large companies and low for small companies when grouped by size. Finally, asset correlation is high for high and low credit-rated companies, and low for middle credit-rated companies, when grouped by credit rating.
- *1 Financial Systems and Bank Examination Department (currently Personnel and Corporate Affairs Department).
Correspondent: Risk Assessment Section, Financial Systems and Bank Examination Department (E-mail: email@example.com).
This paper is the English-translated version of BOJ Working Paper Series No.08-J-10 issued on June 2008 (in Japanese).
I would like to thank Prof. Soichiro Moridaira, Mr. Jun Muranaga, Mr. Toshifumi Ikemori, Regional Banks Association of Japan and the staff of the Bank of Japan for their helpful comments. The views expressed here, as well as any remaining errors, belong to the author and should not be ascribed to the Bank of Japan or Financial Systems and Bank Examination Department.
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