The Correlation Effect

23 Pages Posted: 18 Nov 2000

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Research; 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


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). Available at SSRN: or

Hans Gersbach

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

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

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

Centre for Economic Policy Research (CEPR)

United Kingdom

Alexander Lipponer (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main

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