Common Failings: How Corporate Defaults are Correlated
We develop, and apply to data on U.S. corporations from 1979-2004, tests of the standard doubly-stochastic assumption under which firms'default times are correlated only as implied by the correlation of factors determining their default intensities. This assumption is violated in the presence of contagion or "frailty" (unobservable explanatory variables that are correlated across firms). Our tests do not depend on the time-series properties of default intensities. The data do not support the joint hypothesis of well specified default intensities and the doubly-stochastic assumption. There is also some evidence of default clustering in excess of that implied by the doubly-stochastic model with the given intensities.
|Date of creation:||Jan 2006|
|Publication status:||published as Das, Sanjiv R., Darrell Duffie, Nikunj Kapadia, and Leandro Saita. "Common Failings: How Corporate Defoults are Correlated." Journal of Finance 62, 1 (February 2007): 93-117.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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