What is the autocorrelation for the default rates in Table 11.6, which can also be found on a spreadsheet on the author’s website? What are the implications of this for a Credit Risk Plus model?

Question

Table 11.6 Annual Percentage Default Rate for All Rated Companies, 1970–2016
Default Rate	Year	Default Rate	Year	Default Rate	Year
2.924	2002	1.83	1986	2.631	1970
1.828	2003	1.423	1987	0.286	1971
0.834	2004	1.393	1988	0.453	1972
0.647	2005	2.226	1989	0.456	1973
0.593	2006	3.572	1990	0.275	1974
0.349	2007	2.803	1991	0.361	1975
2.507	2008	1.337	1992	0.176	1976
4.996	2009	0.899	1993	0.354	1977
1.232	2010	0.651	1994	0.354	1978
0.906	2011	0.899	1995	0.088	1979
1.23	2012	0.506	1996	0.344	1980
1.232	2013	0.616	1997	0.162	1981
0.939	2014	1.137	1998	1.04	1982
1.732	2015	2.123	1999	0.9	1983
2.149	2016	2.455	2000	0.869	1984
		3.679	2001	0.952	1985

Accepted Answer

The autocorrelation is quite high at 0.546. This suggests that the credit VaR estimate should take account of recent default experience. If the default rate was high this year. last year, it is more likely to be high this year.

Question 21.8: What is the autocorrelation for the default rates in Table 1...

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