The Correlation Effect

23 Pages Posted: 18 Nov 2000

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Alexander Lipponer

Deutsche Bundesbank

Date Written: October 2000

Abstract

We examine how the correlations of bank loan defaults depend on the correlations of asset returns and how correlations and diversification are affected by macroeconomic risks. We highlight the main properties of the relationship between asset returns and default correlations, illustrating how adverse macroeconomic shocks raise not only the likelihood of defaults, but also the correlation of defaults. The latter effect, called "correlation effect", may account for more than 50% of the increase in the credit risk.

Keywords: Credit portfolio management, default correlations, macroeconomic shocks, correlation effect, Monte-Carlo Simulation

JEL Classification: F47, G11, G33

Suggested Citation

Gersbach, Hans and Lipponer, Alexander, The Correlation Effect (October 2000). EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=250092 or http://dx.doi.org/10.2139/ssrn.250092

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alexander Lipponer (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
1,504
Abstract Views
5,261
rank
11,576
PlumX Metrics