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Exploring the sources of default clustering

S Azizpour, K. Giesecke and G. Schwenkler

Journal of Financial Economics, 2018, vol. 129, issue 1, 154-183

Abstract: We study the sources of corporate default clustering in the United States. We reject the hypothesis that firms’ default times are correlated only because their conditional default rates depend on observable and latent systematic factors. By contrast, we find strong evidence that contagion, through which the default by one firm has a direct impact on the health of other firms, is a significant clustering source. The amount of clustering that cannot be explained by contagion and firms’ exposure to observable and latent systematic factors is insignificant. Our results have important implications for the pricing and management of correlated default risk.

Keywords: Default clustering; Contagion; Frailty; Correlated default risk (search for similar items in EconPapers)
JEL-codes: G12 G33 C5 C41 (search for similar items in EconPapers)
Date: 2018
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