Asset correlation and credit quality

Date created
In this paper the estimation procedure developed by Jones and Zanganeh (2011) is expanded to a multifactor blockwise structure. That is, maximum likelihood estimates of parameters of blockwise equicorrelated Wiener processes observed at discrete time intervals are presented. The estimation procedure then is used to provide a likelihood ratio test for the relation between asset correlation and default probability which is assumed to be negative in Basel II Accord. Using monthly stock prices (December 2002 to March 2011) of North America Oil & Gas, Technology and Industrials companies, we find this relation tends to be positive. We also observe some systematic impacts from the financial crisis on the behaviour of stock prices. Volatility and correlation have substantially increased from the second quarter of 2008 which is followed by a subsequent decline toward the end of the period.
Copyright statement
Copyright is held by the author.
The author granted permission for the file to be printed and for the text to be copied and pasted.
Scholarly level
Member of collection
Attachment Size
etd6861_MZanganeh.pdf 319.37 KB