Dynamic Dependence and Diversification in Corporate Credit*

Asymmetric correlations of equity portfolios

Peter Christoffersen, Kris Jacobs, Xisong Jin and Hugues Langlois

Review of Finance, 2018, vol. 22, issue 2, 521-560

Abstract: We characterize dependence in corporate credit and equity returns for 215 firms using a new class of large-scale dynamic copula models. Copula dependence and especially tail dependence are highly variable and persistent, increase significantly in the financial crisis, and have remained high since. The most drastic increases in credit dependence occur in July/August of 2007 and in August of 2011 and the decrease in diversification potential caused by the increases in dependence and tail dependence is large. Credit default swap correlation dynamics are important determinants of credit spreads.

Keywords: Credit risk; Default risk; CDS; Dynamic dependence; Copula (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (8)

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