Confidence Sets for Asset Correlation
by Delphine Cassart of the Universite Libre de Bruxelles,
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. In both cases it is a regularity to find that the inferior bounds are most of the time negative while the superior bounds are most of the time positive, implying that most of the correlations are not significantly different from zero.
Keywords: asset correlation, transition matrices, bootstrap.
Related reading: CreditMetrics -- Technical Document