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Credit risk diversification: evidence from the eurobond market

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  • Simone Varotto

Abstract

This paper studies the role of diversification in reducing the volatility of corporate bond returns induced by changes in credit spreads. Specifically, it looks at how credit risk can be diminished when a portfolio is diversified across countries, industry sectors, maturities, seniority types and credit ratings. The role of national industrial structures for international diversification is also investigated. The results suggest that geographical diversification is more effective in reducing portfolio risk than alternative investment strategies considered, and that industry effects are not material to this result. Finally, the paper explores the implications of these findings for credit risk capital regulation in banks.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp199.pdf
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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 199.

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Date of creation: Sep 2003
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Handle: RePEc:boe:boeewp:199

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Cited by:
  1. 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.
  2. Carlos Castro, 2010. "Portfolio choice under local industry and country factors," Financial Markets and Portfolio Management, Springer, vol. 24(4), pages 353-393, December.
  3. Pieterse-Bloem, M., 2011. "The effect of Emu on bond market integration and investor portfolio allocations," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4742837, Tilburg University.

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