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Dynamic Diversification in Corporate Credit

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  • Peter Christoffersen

    ()
    (University of Toronto and CREATES)

  • Kris Jacobs

    ()
    (University of Houston)

  • Xisong Jin

    ()
    (University of Luxembourg)

  • Hugues Langlois

    ()
    (McGill University)

Abstract

We characterize diversification in corporate credit using a new class of dynamic copula models which can capture dynamic dependence and asymmetry in large samples of firms. We also document important differences between credit spread and equity return dependence dynamics. Modeling a decade of weekly CDS spreads for 215 firms, we find that copula correlations are highly time-varying and persistent, and that they increase significantly in the financial crisis and have remained high since. Perhaps most importantly, tail dependence of CDS spreads increase even more than copula correlations during the crisis and remain high as well. The most important shocks to credit dependence occur in August of 2007 and in August of 2011, but interestingly these dates are not associated with significant changes to median credit spreads.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-46.

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Length: 44
Date of creation: 11 2013
Date of revision:
Handle: RePEc:aah:create:2013-46

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Web page: http://www.econ.au.dk/afn/

Related research

Keywords: Credit risk; default risk; CDS; dynamic dependence; copula;

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