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Exploring the sources of default clustering

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  • Azizpour, S
  • Giesecke, K.
  • Schwenkler, G.

Abstract

We study the sources of corporate default clustering in the United States. We reject the hypothesis that firms’ default times are correlated only because their conditional default rates depend on observable and latent systematic factors. By contrast, we find strong evidence that contagion, through which the default by one firm has a direct impact on the health of other firms, is a significant clustering source. The amount of clustering that cannot be explained by contagion and firms’ exposure to observable and latent systematic factors is insignificant. Our results have important implications for the pricing and management of correlated default risk.

Suggested Citation

  • Azizpour, S & Giesecke, K. & Schwenkler, G., 2018. "Exploring the sources of default clustering," Journal of Financial Economics, Elsevier, vol. 129(1), pages 154-183.
  • Handle: RePEc:eee:jfinec:v:129:y:2018:i:1:p:154-183
    DOI: 10.1016/j.jfineco.2018.04.008
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    More about this item

    Keywords

    Default clustering; Contagion; Frailty; Correlated default risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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