TY - JOUR T1 - Instantaneous Credit Risk Correlation JF - The Journal of Fixed Income SP - 5 LP - 12 DO - 10.3905/jfi.2007.695281 VL - 17 IS - 2 AU - Hans N.E. Byström Y1 - 2007/09/30 UR - https://pm-research.com/content/17/2/5.abstract N2 - In this article we suggest a way of estimating instantaneous credit risk correlations. The method, which is an extension of the Solnik and Roulet dispersion-based correlation measure [Solnik and Roulet [2000]. Dispersion as cross-sectional correlation. Financial Analysts Journal, 56, 54-61] to the credit market, relies on credit spreads and instead of taking a time-series perspective it uses the cross-section of spreads. The two main advantages of the method are that the day-to-day dynamics of the correlation can be studied and that one single “global” correlation parameter is produced. The former is an advantage, generally, considering the short history of the credit derivatives market as well as the growing interest in correlation trading and the latter is an advantage, particularly, in the quickly growing structured credit portfolio market. In the empirical part of the article we present some evidence on the dynamics of credit risk correlations throughout the history of the credit default swap index market. Finally, we discuss some areas where the approach could be particularly useful.TOPICS: CLOs, CDOs, and other structured credit, credit risk management, credit default swaps ER -