Correlated defaults: let’s go back to the data
Estimates of asset value correlation are a key element of Merton-style credit portfolio models. Many practitioners have access to asset value data for a large universe of listed firms, so estimation is within reach. Alan Pitts describes a statistical approach to estimating asset value correlation that has several advantages: estimates are easy to assign to unlisted firms and are sensitive to firm size, and estimation is straightforward with standard statistical software
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