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Currently I am working with huge data frame which consists of a lot firms. For each firm in my sample I calculated asset volatility ( I am using Merton default probability model, so I have used 2 equation approach to calculate asset value and asset volatility). Then I have divided my sample into parts (let s call them portfolios) based on industry and size factor. Now I would like to calculate the asset volatility of each part ( portfolio) in order to use it in the analysis. My problem is that I cannot calculate pairwise correlation between firms in the same portfolio and that s reason I have directed myself here.

Possibly you have heard about the modeled volatility of KMV Merton model which you can access:

http://citeseerx.ist.psu.edu/viewdoc/download?rep=rep1&type=pdf&doi=10.1.1.204.1352

I want to approximate their calculations but as it is not elaborated there I would kindly ask you suggestions.

Regards, Jack

share|improve this question
    
Try using a factor model? –  John Mar 1 at 2:37
    
Is this question about GCorr? If so, yes it uses a factor model approach. moodysanalytics.com/~/media/Insight/Quantitative-Research/… –  adam Mar 4 at 22:08

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