Common Failings: How Corporate Defaults Are Correlated

Sanjiv Ranjan Das; Darrell Duffie; Nikunj Kapadia; Leandro Saita

doi:10.1111/j.1540-6261.2007.01202.x

Journal of Finance Vol. 62 No. 1 2007

Common Failings: How Corporate Defaults Are Correlated

Sanjiv Ranjan Das¹; Darrell Duffie¹; Nikunj Kapadia¹; Leandro Saita^2,3,4,1,5

¹ University of Massachusetts Amherst · ² Conference Board · ³ Federal Deposit Insurance Corporation · ⁴ Santa Clara University · ⁵ Stanford University

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Abstract

We test the doubly stochastic assumption under which firms' default times are correlated only as implied by the correlation of factors determining their default intensities. Using data on U.S. corporations from 1979 to 2004, 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. We find some evidence of default clustering exceeding that implied by the doubly stochastic model with the given intensities.

DOI: 10.1111/j.1540-6261.2007.01202.x
Volume: 62
Issue: 1
Pages: 93-117
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Common Failings: How Corporate Defaults Are Correlated

Abstract

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