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Common Failings: How Corporate Defaults are Correlated

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  • Sanjiv Das
  • Darrell Duffie
  • Nikunj Kapadia
  • Leandro Saita

Abstract

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.

Suggested Citation

  • Sanjiv Das & Darrell Duffie & Nikunj Kapadia & Leandro Saita, 2006. "Common Failings: How Corporate Defaults are Correlated," NBER Working Papers 11961, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11961 Note: AP CF
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    References listed on IDEAS

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    12. Zhou, Chunsheng, 2001. "An Analysis of Default Correlations and Multiple Defaults," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 555-576.
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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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