Are Corporate Bond Defaults Contagious across Sectors?

Colin Ellis
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Colin Ellis: Department of Economics, University of Birmingham, Birmingham B15 2TT, UK

IJFS, 2020, vol. 8, issue 1, 1-17

Abstract: Corporate bond defaults in different sectors often increase suddenly at roughly similar times, although some sectors see default rates jump earlier than others. This could reflect contagion among sectors—specifically, defaults in one sector leading to credit stresses in other sectors of the economy that would not otherwise have seen stresses. To complicate matters, simple correlation-based tests for contagion are often biased, reflecting increased volatility in periods of stress. This paper uses sectoral default data from over 30 sectors to test for signs of contagion over the past 30 years. While jumps in sectoral default rates do often coincide, there is no consistent evidence of contagion across different periods of stress from unbiased test results. Instead, coincident jumps in sectoral default rates are likely to reflect common macroeconomic shocks.

Keywords: credit risk; corporate bonds; default contagion (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2020
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