Asset correlation for credit risk analysis -- Empirical study of default data for Japanese companies --

This paper estimates and discusses asset correlations using a Merton-type factor model, based on time-series data on active and default companies in Japan by industry, size, credit rating and region. The results are as follows. First, one common factor is not always adequate for the precise estimation of asset correlations. Second, asset correlation varies across industry, size, credit rating and region groups. Third, asset correlation is high for large companies and low for small companies when grouped by size. Finally, asset correlation is high for high and low credit-rated companies, and low for middle credit-rated companies, when grouped by credit rating.