Abstract
This paper is an attempt to estimate default correlation within and across different rating grades and sectors for corporate in India. The default probabilities and correlations are estimated conditional on the rating of the issuer. The CRISIL’S annual ratings of long term debts issued by 578 corporate (Manufacturing Companies) formed the basis of analysis. The correlation of manufacturing companies is estimated empirically with times series of default for last sixteen years i.e. from January 1994 to January 2009. It is found from the analysis that default probabilities and correlation estimates vary with time, rating of the issuer and economic activity of the issuer. It is also found that the correlation is highest between companies within the same rating grade and industry, because of borrower and industry specific factors. The results of this study will hint, how risk capital requirement differ for different rating grades and industry depending on size of unexpected loss in the bank's credit portfolio?
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