Dynamic Dependence and Diversification in Corporate Credit

47 Pages Posted: 22 Aug 2013 Last revised: 7 Jul 2016

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Xisong Jin

Central Bank of Luxembourg

Hugues Langlois

HEC Paris - Finance Department

Date Written: July 5, 2016

Abstract

We characterize dependence in corporate credit and equity returns for 215 …firms using a new class of large-scale dynamic copula models. Copula dependence and especially tail dependence are highly variable and persistent, increase signifi…cantly in the fi…nancial crisis, and have remained high since. The most drastic increases in credit dependence occur in July/August of 2007 and in August of 2011 and the decrease in diversifi…cation potential caused by the increases in dependence and tail dependence is large. CDS correlation dynamics help explain the time-series variation in CDO tranche spreads and are also important determinants of credit spreads.

Keywords: Credit risk, default risk, CDS, dynamic dependence, copula

JEL Classification: G12

Suggested Citation

Christoffersen, Peter and Jacobs, Kris and Jin, Xisong and Langlois, Hugues, Dynamic Dependence and Diversification in Corporate Credit (July 5, 2016). Rotman School of Management Working Paper No. 2314027; Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper. Available at SSRN: https://ssrn.com/abstract=2314027 or http://dx.doi.org/10.2139/ssrn.2314027

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

HOME PAGE: http://www.christoffersen.com

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

University of Aarhus - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Xisong Jin

Central Bank of Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg
(+352) 4774 4462 (Phone)
(+352) 4774 4902 (Fax)

Hugues Langlois

HEC Paris - Finance Department ( email )

France

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