Correlated Default Risk

∗We are extremely thankful for many constructive suggestions from Gurdip Bakshi, N. Chidambaran, Darrell Duffie, Rong Fan, Gifford Fong, John Knight, N. R. Prabhala, Jun Pan, Dmitry Pugachevsky, Shuyan Qi, Ken Singleton, Rangarajan Sundaram, Suresh Sundaresan and Haluk Unal. We received useful feedback from participants at various seminars: at the AIMR talks in Tokyo, Singapore and Sydney, the AIMR Research Foundation Workshop in Toronto, Risk conferences in Boston and New York, BGI in San Francisco and Citicorp in New York, the Credit Conference at Carnegie-Mellon University, Institutional Investors’ Fixed Income Forum, the Mathematical Sciences Research Institute workshop on Event Risk, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, and discussants and participants at the 2003 meetings of American Finance Association and European Finance Association. The first author gratefully acknowledges support from the Price Waterhouse Cooper’s Risk Institute, the Dean Witter Foundation, and a Research Grant from Santa Clara University. We are also grateful to Gifford Fong Associates, and Moody’s Investors Services for data and research support for this paper. Please address all correspondence to Professor Sanjiv Das, Professor, Santa Clara University, Leavey School of Business, Dept of Finance, 208 Kenna Hall, Santa Clara, CA 95053-0388. Email: [email protected].