TY - JOUR T1 - Do We Need to Worry about Credit Risk Correlation? JF - The Journal of Fixed Income SP - 42 LP - 59 DO - 10.3905/jfi.2005.605423 VL - 15 IS - 3 AU - Abel Elizalde Y1 - 2005/12/31 UR - https://pm-research.com/content/15/3/42.abstract N2 - Yes we do. This article shows that any firm's credit risk is, to a very large extent, driven by common risk factors affecting all firms. Using a reduced form model and sequential Kalman filtering estimation, we decompose the credit risk of a sample of corporate bonds (14 U.S. firms, 2001–2003) into different unobservable risk factors. A single common factor accounts for more than 50% of all (but two) of the firms' credit risk levels, with an average of 68% across firms. This factor represents the credit risk levels underlying the U.S. economy and is strongly correlated with main U.S. stock indexes. ER -