Credit Risk Diversification
AbstractWe study the role of diversification in reducing the volatility of corporate bond returns induced by changes in credit spreads. Specifically, we look 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 on international diversification is also investigated. Our results show that geographical diversification is more effective in reducing portfolio risk than any alternative investment strategy we consider, and that industry effects are not material to this result. Finally, we explore the implications of our findings for credit risk capital regulation in banks.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2001-07.
Length: 35 pages
Date of creation: Aug 2001
Date of revision:
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More information through EDIRC
Credit Risk Diversification; Globally and locally systematic risk; bond ratings;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
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