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Takayuki Shiohama

Tokyo University of Science



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504 – Risk, Prediction, and Financial Econometrics

Asymptotic Expansion of One-Factor Merton Models with Non-Gaussian and Serially Correlated Innovations

Sponsor: Business and Economic Statistics Section
Keywords: asset correlation, credit risk, Edgeworth expansion, probability of default, single risk factor model

Takayuki Shiohama

Tokyo University of Science

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.

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