Correlation in credit risk changes |
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Authors: | Xiaoling Pu Xinlei Zhao |
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Institution: | 1. Department of Finance, Kent State University, Kent, OH 44242, USA;2. Credit Risk Analysis Division, Office of the Comptroller of the Currency, 250 E St. SW, Washington, DC 20219, USA |
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Abstract: | The current economic climate makes understanding credit risk correlation particularly important. After allowing for a comprehensive set of observable firm-specific, industry, market, and macroeconomic factors, there is an economically significant co-movement in credit default swap spreads that remains to be explained. Including a time dummy completely accounts for the remaining co-movement, confirming the existence of a systematic component that has been previously unaccounted for. Our findings suggest that it may be important to consider unobservable risk factor(s) in credit risk models. |
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Keywords: | G28 G33 |
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