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Firm Defaults and the Correlation Effect
Author(s) -
Gersbach Hans,
Lipponer Alexander
Publication year - 2003
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00225
Subject(s) - default , diversification (marketing strategy) , loan , economics , asset (computer security) , correlation , econometrics , monetary economics , financial economics , business , finance , mathematics , computer science , geometry , computer security , marketing
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.