Default Correlation Among Investment-Grade Borrowers

Abstract

Default correlation is important for analysts assessing the credit risk in jointly supported transactions such as swaps and asset-backed transactions. The effect of default correlation has implication for a transaction's total default risk. This study provides evidence that there are no default correlations among investment-grade default events in short time periods. Nor does the empirical evidence support the view that the general economy and investment-grade defaults are related in short time periods. That is, short-term default risks among investment-grade borrowers can be entirely diversified.