Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 129, Issue 1, Pages 154-183Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2018.04.008
Keywords
Default clustering; Contagion; Frailty; Correlated default risk
Categories
Funding
- Moody's Corporation
- Global Association of Risk Professionals
- Mayfield Stanford Graduate Fellowship
- Lieberman Fellowship
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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. (C) 2018 Elsevier B.V. All rights reserved.
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