Abstract
This paper provides a unified setting for factor models applied to panels of qualitative observations. This setting includes as special cases the single risk factor modelanditsmultiplefactorextensionsusedincreditriskanalysis,thestochastic migration models used for rating dynamics and the factor models for prospective mortalitytables.Thebehaviorofthesemodelswhenthecross-sectionaldimension is large is considered and granularity adjustments for the maximum-likelihood estimatorsofthefactorsensitivitiesarederived.Thesestepsarenecessaryinorder to analyze the effect of estimation risk on measures of credit portfolio risk. The methodology is illustrated by a Monte Carlo study of the finite sample properties of the estimators.
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