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Published in:
2005 | OriginalPaper | Chapter
Smooth Correlation Estimation with Application to Portfolio Credit Risk
Authors : Rafael Weißbach, Bernd Rosenow
Published in: Classification — the Ubiquitous Challenge
Publisher: Springer Berlin Heidelberg
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When estimating high-dimensional PD correlation matrices from short times series the estimation error hinders the detection of a signal. We smooth the empirical correlation matrix by reducing the dimension of the parameter space from quadratic to linear order with respect to the dimension of the underlying random vector. Using the method by Plerou et al. (2002) we present evidence for a one-factor model. Using the noise-reduced correlation matrix leads to increased security of the economic capital estimate as estimated using the credit risk portfolio model CreditRisk
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