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Activity Number: 504
Type: Contributed
Date/Time: Wednesday, August 3, 2016 : 8:30 AM to 10:20 AM
Sponsor: Business and Economic Statistics Section
Abstract #320249 View Presentation
Title: Asymptotic Expansion of One-Factor Merton Models with Non-Gaussian and Serially Correlated Innovations
Author(s): Takayuki Shiohama*
Companies: Tokyo University of Science
Keywords: asset correlation ; credit risk ; Edgeworth expansion ; probability of default ; single risk factor model

The one-factor Merton model in the context of CreditMetrics is specialized by a single factor common to all counterparties. We extend the structural credit risk model to a model that includes underlying single risk factor and issuer-specific process have non-Gaussian and serially correlated asset returns. By using a standard Edgeworth expansion, we arrive at the closed-form analytic expressions for the default rate distribution. We also provide estimators of the parameters of the asset value process. Our empirical results illustrate the non-negligible effects of the skewness and kurtosis of the distributions on the systematic risk of credit portfolio risk evaluations.

Authors who are presenting talks have a * after their name.

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