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Dynamic Dependence and Diversification in Corporate Credit
[Asymmetric correlations of equity portfolios]

Author

Listed:
  • Peter Christoffersen
  • Kris Jacobs
  • Xisong Jin
  • Hugues Langlois

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.

Suggested Citation

  • Peter Christoffersen & Kris Jacobs & Xisong Jin & Hugues Langlois, 2018. "Dynamic Dependence and Diversification in Corporate Credit [Asymmetric correlations of equity portfolios]," Review of Finance, European Finance Association, vol. 22(2), pages 521-560.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:2:p:521-560.
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    More about this item

    Keywords

    Credit risk; Default risk; CDS; Dynamic dependence; Copula;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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