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Asset correlation for credit risk analysis -- Empirical study of default data for Japanese companies --

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  • Takashi Hashimoto

    (Bank of Japan)

Abstract

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.

Suggested Citation

  • Takashi Hashimoto, 2009. "Asset correlation for credit risk analysis -- Empirical study of default data for Japanese companies --," Bank of Japan Working Paper Series 09-E-3, Bank of Japan.
    • Handle: RePEc:boj:bojwps:09-e-3
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Lopez, Jose A., 2004. "The empirical relationship between average asset correlation, firm probability of default, and asset size," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 265-283, April.
    3. Hamerle, Alfred & Liebig, Thilo & Rösch, Daniel, 2003. "Credit Risk Factor Modeling and the Basel II IRB Approach," Discussion Paper Series 2: Banking and Financial Studies 2003,02, Deutsche Bundesbank.
    4. Michel Dietsch, 2004. "Should SME exposures be treated as retail or corporate exposures: a comparative analysis of probabilities of default and assets correlations in French and German SMEs," ULB Institutional Repository 2013/14164, ULB -- Universite Libre de Bruxelles.
    5. Petr Jakubík, 2006. "Does Credit Risk Vary with Economic Cycles? The Case of Finland," Working Papers IES 2006/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2006.
    6. Dietsch, Michel & Petey, Joel, 2004. "Should SME exposures be treated as retail or corporate exposures? A comparative analysis of default probabilities and asset correlations in French and German SMEs," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 773-788, April.
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    Cited by:

    1. Christoph Wunderer, 2017. "Asset correlation estimation for inhomogeneous exposure pools," Papers 1701.02028, arXiv.org, revised Sep 2019.
    2. Byström, Hans, 2017. "The currency composition of firms' balance sheets, asset value correlations, and capital requirements," Global Finance Journal, Elsevier, vol. 34(C), pages 89-99.
    3. Düllmann, Klaus & Koziol, Philipp, 2013. "Evaluation of minimum capital requirements for bank loans to SMEs," Discussion Papers 22/2013, Deutsche Bundesbank.
    4. M. Dietsch & K. Düllmann & H. Fraisse & P. Koziol & C. Ott, 2016. "Support for the SME Supporting Factor - Multi-country empirical evidence on systematic risk factor for SME loans," Débats économiques et financiers 23, Banque de France.
    5. Byström, Hans, 2016. "The Currency Composition of Firms' Balance Sheets and its Effect on Asset Value Correlations and Capital Requirements," Working Papers 2016:1, Lund University, Department of Economics.

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