Correlated Default Risk

45 Pages Posted: 23 Sep 2002

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Laurence Freed

Moody's Investors Service

Gary Geng

Amaranth Advisors llc

Nikunj Kapadia

University of Massachusetts Amherst - Department of Finance

Date Written: August 2002

Abstract

Using a comprehensive and unique data set from Moody's, we examine correlations between default risk for over 7,000 U.S. public firms. This is the first paper to empirically document the correlation structure both in the time-series and in the cross-section across almost all U.S. non-financial firms. We find that default probabilities of issuers vary over time, and are positively correlated. Moreover, the correlations across firms also vary over time systematically, in a manner that is related to an economy-wide level of default risk. Joint default risk increases as the default risk in the economy increases. Our results also suggest that the magnitude of joint default depends on the quality of issuers; highest quality issuers have higher default correlations than medium grade firms.

Suggested Citation

Das, Sanjiv Ranjan and Freed, Laurence and Geng, Gary and Kapadia, Nikunj, Correlated Default Risk (August 2002). EFA 2003 Annual Conference Paper No. 928; AFA 2003 Washington, DC Meetings, Available at SSRN: https://ssrn.com/abstract=331901 or http://dx.doi.org/10.2139/ssrn.331901

Sanjiv Ranjan Das (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://srdas.github.io/

Laurence Freed

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Gary Geng

Amaranth Advisors llc ( email )

Greenwich, CT 06831
United States

Nikunj Kapadia

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States
413-545-5643 (Phone)
413-545-5600 (Fax)

HOME PAGE: http://www-unix.oit.umass.edu/~nkapadia/

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