Common Failings: How Corporate Defaults are Correlated

29 Pages Posted: 23 Jan 2006 Last revised: 8 Mar 2021

See all articles by Sanjiv Ranjan Das

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Nikunj Kapadia

University of Massachusetts Amherst - Department of Finance

Leandro Saita

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: January 2006

Abstract

We develop, and apply to data on U.S. corporations from 1979-2004, tests of the standard doubly-stochastic assumption under which firms'default times are correlated only as implied by the correlation of factors determining their default intensities. This assumption is violated in the presence of contagion or "frailty" (unobservable explanatory variables that are correlated across firms). Our tests do not depend on the time-series properties of default intensities. The data do not support the joint hypothesis of well specified default intensities and the doubly-stochastic assumption. There is also some evidence of default clustering in excess of that implied by the doubly-stochastic model with the given intensities.

Suggested Citation

Das, Sanjiv Ranjan and Duffie, James Darrell and Kapadia, Nikunj and Saita, Leandro, Common Failings: How Corporate Defaults are Correlated (January 2006). NBER Working Paper No. w11961, Available at SSRN: https://ssrn.com/abstract=877466

Sanjiv Ranjan Das

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/

James Darrell Duffie (Contact Author)

Stanford University - Graduate School of Business ( email )

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650-725-8916 (Fax)

National Bureau of Economic Research (NBER)

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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/

Leandro Saita

Independent

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