Default correlation: rating, industry ripple effect, and business cycle

Howard Qi, Jian Shi, Yan Alice Xie

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


For a well-diversified bond portfolio, default risk over the investment horizon is known as the major risk and the risk is largely from correlated defaults. While plenty of theoretical work about default correlation has been developed, empirical studies on default correlation have not made much progress in the past two decades. In this paper, we fill this void in the literature by thoroughly investigating how default correlation changes across different bond ratings, over different time horizons, and across different industries over the sample period of 1970 to 2014. In particular, we examine how rating-based default correlations change before, during, and after recessions. More importantly, we reveal the ‘industry ripple effect’ that default correlations are low within upstream industries but become higher within downstream industries along the structure of the supply chain. Also, default correlations are relatively high between upstream industries and downstream industries.

Original languageEnglish (US)
Pages (from-to)3256-3273
Number of pages18
JournalApplied Economics
Issue number30
StatePublished - Jun 27 2019
Externally publishedYes


  • Default correlation
  • and recession
  • bond rating
  • industries

ASJC Scopus subject areas

  • Economics and Econometrics


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