Dynamic Dependence and Diversification in Corporate Credit
47 Pages Posted: 22 Aug 2013 Last revised: 7 Jul 2016
Date Written: July 5, 2016
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: Suggested Citation