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Firm Defaults and the Correlation Effect

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Author Info

  • Hans Gersbach
  • Alexander Lipponer

Abstract

We examine how the correlations of bank loan defaults depend on the correlations of asset returns and how correlations and diversification are affected by macroeconomic risks. We highlight the main properties of the relationship between asset returns and default correlations, illustrating how adverse macroeconomic shocks raise not only the likelihood of defaults, but also the correlation of defaults. The latter effect, called correlation effect, may account for more than 50% of the increase in the credit risk. Copyright Blackwell Publishing Ltd 2003.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 9 (2003)
Issue (Month): 3 ()
Pages: 361-378
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Handle: RePEc:bla:eufman:v:9:y:2003:i:3:p:361-378

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Cited by:
  1. Gann, Philipp, 2009. "Liquidität, Risikoeinstellung des Kapitalmarktes und Konjunkturerwartung als Preisdeterminanten von Collateralized Debt Obligations (CDOs) - Eine simulationsgestützte Analyse," Discussion Papers in Business Administration 10582, University of Munich, Munich School of Management.
  2. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer, vol. 26(2), pages 161-191, October.
  3. Bernd Hofmann, 2005. "Procyclicality: The Macroeconomic Impact of Risk-Based Capital Requirements," Financial Markets and Portfolio Management, Springer, vol. 19(2), pages 179-200, August.
  4. Berg, Tobias & Kaserer, Christoph, 2008. "Linking credit risk premia to the equity premium," CEFS Working Paper Series 2008-01, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.

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