Working Paper: NBER ID: w11961
Authors: Sanjiv Das; Darrell Duffie; Nikunj Kapadia; Leandro Saita
Abstract: We develop, and apply to data on U.S. corporations from 1979-2004, tests of the standard doubly-stochastic assumption under which firms'default times are correlated only as implied by the correlation of factors determining their default intensities. This assumption is violated in the presence of contagion or "frailty" (unobservable explanatory variables that are correlated across firms). Our tests do not depend on the time-series properties of default intensities. The data do not support the joint hypothesis of well specified default intensities and the doubly-stochastic assumption. There is also some evidence of default clustering in excess of that implied by the doubly-stochastic model with the given intensities.
Keywords: No keywords provided
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate defaults are not independent Poisson arrivals (G33) | evidence of default clustering (C38) |
| missing macroeconomic covariates (E19) | observed default clustering (C38) |
| periods of low industrial production correlate with higher-than-expected default rates (G33) | unobserved economic conditions influence default probabilities (E44) |