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Common Failings: How Corporate Defaults are Correlated

Sanjiv Das (), Darrell Duffie, Nikunj Kapadia and Leandro Saita

No 11961, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop, and apply to data on U.S. corporations from 1979-2004, tests of the standard doubly-stochastic assumption under which firms'default times are correlated only as implied by the correlation of factors determining their default intensities. This assumption is violated in the presence of contagion or "frailty" (unobservable explanatory variables that are correlated across firms). Our tests do not depend on the time-series properties of default intensities. The data do not support the joint hypothesis of well specified default intensities and the doubly-stochastic assumption. There is also some evidence of default clustering in excess of that implied by the doubly-stochastic model with the given intensities.

JEL-codes: G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-fin and nep-rmg
Date: 2006-01
Note: AP CF
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Published as Das, Sanjiv R., Darrell Duffie, Nikunj Kapadia, and Leandro Saita. "Common Failings: How Corporate Defoults are Correlated." Journal of Finance 62, 1 (February 2007): 93-117.

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