Small-Sample Estimation of Models of Portfolio Credit Risk

Michael Gordy and Erik Heitfield
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Erik Heitfield: Federal Reserve Board, Washington, DC 20551, USA

Chapter 2 in Recent Advances in Financial Engineering 2009, 2010, pp 43-63 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper explores the small sample properties of the most commonly used estimators of ratings-based portfolio credit models. We consider both method of moments and maximum likelihood estimators, and show that unrestricted estimators are subject to large biases in realistic sample sizes. We demonstrate large potential gains in precision and bias-reduction from imposing parametric restrictions across rating buckets. The restrictions we consider are based on economically meaningful hypotheses on the structure of systematic risk.

Keywords: Financial Engineering; Mathematical Finance; Credit Risk; Real Options; Optimal Investment; Heterogeneous Beliefs (search for similar items in EconPapers)
Date: 2010
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