Dynamic Dependence and Diversification in Corporate Credit

Peter Christoffersen; Kris Jacobs; Xisong Jin; Hugues Langlois

doi:10.1093/rof/rfx034

Review of Finance Vol. 22 No. 2 2018

Dynamic Dependence and Diversification in Corporate Credit

Peter Christoffersen¹; Kris Jacobs²; Xisong Jin³; Hugues Langlois⁴

¹ Rotman School of Management, University of Toronto, Copenhagen Business School, and CREATES · ² University of Houston · ³ Central Bank of Luxembourg · ⁴ HEC Paris

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.

DOI: 10.1093/rof/rfx034
Volume: 22
Issue: 2
Pages: 521-560
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Dynamic Dependence and Diversification in Corporate Credit

Abstract

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