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Correlation in credit risk changes

Xiaoling Pu and Xinlei Zhao

Journal of Banking & Finance, 2012, vol. 36, issue 4, 1093-1106

Abstract: The current economic climate makes understanding credit risk correlation particularly important. After allowing for a comprehensive set of observable firm-specific, industry, market, and macroeconomic factors, there is an economically significant co-movement in credit default swap spreads that remains to be explained. Including a time dummy completely accounts for the remaining co-movement, confirming the existence of a systematic component that has been previously unaccounted for. Our findings suggest that it may be important to consider unobservable risk factor(s) in credit risk models.

Keywords: Correlations; Credit risk; Credit spread; Macroeconomic conditions; Industry effect; Unobservable risk factors (search for similar items in EconPapers)
JEL-codes: G28 G33 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:1093-1106