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Hypothesis Test of Default Correlation and Application to Specific Risk
Jan 1, 2010
This paper carries out hypothesis tests on credit migration correlations. It tests both the correlation between obligors and the correlation between credit events and systematic market factors, concluding that neither correlation is significantly larger than zero at short risk horizons. The result indicates that the use of positive credit migration correlations to calculate specific risk for trading portfolios results in an overestimation of required capital.
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