Merton Model with Temporal Correlation

Masato Hisakado
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Masato Hisakado: Nomura Hodings, Inc.

Chapter Chapter 11 in Urn Models and Their Applications in Finance, 2025, pp 171-186 from Springer

Abstract: Abstract In this chapter, we study a Bayesian estimation method using the Merton model. Under normal circumstances, the Merton model incorporates the default correlation by the correlation of asset price movements (asset correlation), which is used for estimating the PD and the correlation. A Monte Carlo simulation is an appropriate tool to estimate parameters, except under the limit of large homogeneous portfolios (Schönbucher 2003).

Date: 2025
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DOI: 10.1007/978-981-96-3825-3_11

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