Correlation in corporate defaults: Contagion or conditional independence?
Abstract
We revisit a method used by Das et al. (2007) (DDKS) who jointly test and reject a specification of firm default intensities and the doubly stochastic assumption in intensity models of default. The method relies on a time change result for counting processes. With an almost identical set of default histories recorded by Moody's in the period from 1982 to 2006, but using a different specification of the default intensity, we cannot reject the tests based on time change used in DDKS. We then note that the method proposed by DDKS is mainly a misspecification test in that it has very limited power in detecting violations of the doubly stochastic assumption. For example, it will not detect contagion which spreads through the explanatory variables "covariates" that determine the default intensities of individual firms. Therefore, we perform a different test using a Hawkes process alternative to see if firm-specific variables are affected by occurrences of defaults, but find no evidence of default contagion.Download Info
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Bibliographic Info
Article provided by Elsevier in its journal Journal of Financial Intermediation.
Volume (Year): 19 (2010)
Issue (Month): 3 (July)
Pages: 355-372
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622875
Related research
Keywords: Default correlation Intensity estimation Hawkes process;References
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Didier Rullière & Diana Dorobantu & Areski Cousin, 2009.
"An extension of Davis and Lo's contagion model,"
Working Papers
hal-00374367, HAL.
- Didier Rulli\`ere & Diana Dorobantu & Areski Cousin, 2009. "An extension of Davis and Lo's contagion model," Papers 0904.1653, arXiv.org, revised Feb 2010.
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Working Papers
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