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Dynamic Diversification in Corporate Credit

Peter Christoffersen, Kris Jacobs (), Xisong Jin () and Hugues Langlois ()
Additional contact information
Kris Jacobs: University of Houston, Postal: Houston, TX 77204-6021, United States
Hugues Langlois: McGill University, Postal: 1001 Sherbrooke St. W, Montreal, Quebec H3A 1G5, Canada

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We characterize diversification in corporate credit using a new class of dynamic copula models which can capture dynamic dependence and asymmetry in large samples of firms. We also document important differences between credit spread and equity return dependence dynamics. Modeling a decade of weekly CDS spreads for 215 firms, we find that copula correlations are highly time-varying and persistent, and that they increase significantly in the financial crisis and have remained high since. Perhaps most importantly, tail dependence of CDS spreads increase even more than copula correlations during the crisis and remain high as well. The most important shocks to credit dependence occur in August of 2007 and in August of 2011, but interestingly these dates are not associated with significant changes to median 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)
Pages: 44
Date: 2013
New Economics Papers: this item is included in nep-ban and nep-cfn
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