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| Confidence Sets for Asset Correlation by Delphine Cassart of the Universite Libre de Bruxelles, July 6, 2007 Abstract: This paper addresses the estimation of confidence sets for asset correlation for credit risk assessment using rating transition data. Research on the estimation of asset correlation with rating transition data has focused on the point estimation of the correlation without giving any consideration with respect to the uncertainty around this point estimators. We obtain for both approaches, Standard Transition Matrix (STRM) and Directional Transition Matrix (DRTM), confidence intervals for the pairwise asset correlations. For half of the groups considered (sectors, structured products and regions), in both methods we find significantly positive correlation while for the others the inferior bounds are most of the time negative while the superior bounds are most of the time positive, implying that correlations are not significantly different from zero. JEL Classification: G32, G33, C01. Keywords: asset correlation, transition matrices, bootstrap. Books Referenced in this Paper: (what is this?)
Download paper (420K PDF) 31 pages Related reading: A Comparative Empirical Study of Asset Correlations
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