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Default dependence among corporate bond issuers: empirical evidence from time series data

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  • Natalia Puzanova
  • Sikandar Siddiqui

Abstract

This study shows that the extent to which the asset returns of different obligors are correlated is of vital importance for a realistic assessment credit portfolio risk. The high empirical relevance of this phenomenon is demonstrated by applying a likelihood-based estimation procedure to time series data on historical default frequencies. It turns out that, apparently, the default probabilities of speculative-grade debtors are much more highly correlated than the ones of investment-grade borrowers.

Suggested Citation

  • Natalia Puzanova & Sikandar Siddiqui, 2005. "Default dependence among corporate bond issuers: empirical evidence from time series data," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(5), pages 297-302, September.
  • Handle: RePEc:taf:apfelt:v:1:y:2005:i:5:p:297-302
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
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    Cited by:

    1. Puzanova, Natalia & Siddiqui, Sikandar & Trede, Mark, 2009. "Approximate value-at-risk calculation for heterogeneous loan portfolios: Possible enhancements of the Basel II methodology," Journal of Financial Stability, Elsevier, vol. 5(4), pages 374-392, December.

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