Are Defaults Correlated? An Empirical Study

This paper investigates default correlations. Both inter-industry default correlations and intra-industry default correlations are examined using historical default rates by industry. The state of the economy, i.e. expansionary and recessionary periods, is incorporated in the study to evaluate their impact on default correlations. Specifically, macro-economic variables are linked to default rates per industry to investigate default correlation cyclicality. Finally, the empirical evidence of the relationship between equity correlation and default correlation is studied using observable industry equity index return correlation as a proxy.