  The risk of a credit portfolio depends crucially on correlations between the
probability of default (PD) in different economic sectors. Often, PD
correlations have to be estimated from relatively short time series of default
rates, and the resulting estimation error hinders the detection of a signal. We
present statistical evidence that PD correlations are well described by a
(one-)factorial model. We suggest a method of parameter estimation which avoids
in a controlled way the underestimation of correlation risk. Empirical evidence
is presented that, in the framework of the CreditRisk+ model with integrated
correlations, this method leads to an increased reliability of the economic
capital estimate.
