Abstract
This paper examines granularity adjustments to parameter estimators in a default risk model with cohorts. The model is an extension of the Vasicek model (Vasicek, 1991) and includes a general factor and cohort specific factors. The granularity adjustments derived in the paper concern the mean and/or the variance of observed default frequencies and are easy to implement in practice. For illustration, the method is applied to the S&P corporate ratings. The Granularity Adjusted (GA) estimators are compared to the unadjusted estimators in terms of their asymptotic properties and in finite sample.
| Original language | English |
|---|---|
| Pages (from-to) | 1464-1477 |
| Number of pages | 14 |
| Journal | Journal of Banking and Finance |
| Volume | 36 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - 1 May 2012 |
| Externally published | Yes |
Keywords
- Factor model
- Granularity adjustment
- Idiosyncratic risk
- Systematic risk