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Estimating asset correlations from stock prices or default rates: which method is superior?

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  • Düllmann, Klaus
  • Kunisch, Michael
  • Küll, Jonathan
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    Abstract

    This paper sets out to help explain why estimates of asset correlations based on equity prices tend to be considerably higher than estimates based on default rates. Resolving this empirical puzzle is highly important because, firstly, asset correlations are a key driver of credit risk and, secondly, both data sources are widely used to calibrate risk models of financial institutions. By means of a simulation study, we explore the hypothesis that differences in the correlation estimates are due to a substantial downward bias characteristic of estimates based on default rates. Our results suggest that correlation estimates from equity returns are more efficient than those from default rates. This finding still holds if the model is misspecified such that asset correlations follow a Vasicek process which affects foremost the estimates from equity returns. The results lend support for the hypothesis that the downward bias of default-rate based estimates is an important although not the only factor to explain the differences in correlation estimates. Furthermore, our results help to quantify the estimation error of asset correlations dependent on the risk characteristics of the underlying data base. -- Abhängigkeiten zwischen den Ausfallereignissen von Kreditnehmern sind ein wesentlicher Treiber des Kreditrisikos in Kreditportfolien. Solche Abhängigkeiten werden gewöhnlich durch Asset-Korrelationen zwischen Firmenwertänderungen gemessen. Da Firmenwertänderungen nicht beobachtbar sind, werden diese Korrelationen oft aus Zeitreihen von Aktienrenditen oder aus historischen Ausfallraten geschätzt. Beide Ansätze haben in der Forschung zu erheblich unterschiedlichen Ergebnissen geführt. Da empirische Untersuchungen unterschiedliche Stichproben verwenden, ist es bisher nicht möglich gewesen, diese Unterschiede zu erklären. In diesem Arbeitspapier untersuchen wir die Hypothese, dass die beobachteten Unterschiede sich aus unterschiedlichen statistischen Eigenschaften der Schätzmethoden erklären, die jeweils bei der Schätzung aus Aktienrenditen und aus Ausfallraten verwendet werden. Eine Bestätigung der Hypothese kann Kreditrisikomanagern eine Hilfestellung geben bei der Auswahl der geeigneten Datenquelle für die Schätzung von Asset-Korrelationen. Um diese Hypothese zu bestätigen, verwenden wir eine umfassende Simulationsstudie mit einer Vielzahl von Risikoparametern und unterschiedlich großen Kreditportfolien. Wir beobachten, dass die statistischen Methoden eine wichtige Rolle bei der Erklärung der Unterschiede zwischen den Schätzwerten von Asset-Korrelationen basierend auf Aktienrenditen oder Ausfallraten spielen. Es ist grundsätzlich empfehlenswert, Aktienrenditen für die Schätzung zu verwenden, da die statistischen Fehler in diesem Fall geringer sind. Diese Beobachtung gilt auch, falls das Modell insofern fehlspezifiziert ist, als die Asset-Korrelationen nicht wie im Model unterstellt über die Zeit konstant sind, sondern einem stochastischen Prozess folgen.

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2008,04.

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    Date of creation: 2008
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    Handle: RePEc:zbw:bubdp2:7314

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    Keywords: Asset correlation; single risk factor model; small sample properties; structural model; Basel II;

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    1. Rösch, Daniel, 2003. "Correlations and Business Cycles of Credit Risk: Evidence from Bankruptcies in Germany," University of Regensburg Working Papers in Business, Economics and Management Information Systems 380, University of Regensburg, Department of Economics.
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