Asset Correlation Matrix
Asset correlation matrices can be estimated from the corresponding Equity Correlation Matrix but may incorporate additional transformations that take into account the liability structure of the firm. The underlying theory supporting the use of an asset matrix as input to estimating Default Correlation is that of Structural Credit Models.
While in principle asset correlations can be estimated directly between any two entities, in practice some factor structure may be employed:
Sectoral / Regional Model
A common variation of the asset correlation matrix imposes as sectoral / regional structure
Under this factorization, if is the asset process of an obligor, its beta with a factor and is the correlation between factors I and J, the asset correlation matrix is given by
- Credit Metrics Technical Document, 1997