@article {Elizalde42, author = {Abel Elizalde}, title = {Do We Need to Worry about Credit Risk Correlation?}, volume = {15}, number = {3}, pages = {42--59}, year = {2005}, doi = {10.3905/jfi.2005.605423}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Yes we do. This article shows that any firm{\textquoteright}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{\textendash}2003) into different unobservable risk factors. A single common factor accounts for more than 50\% of all (but two) of the firms{\textquoteright} 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.}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/15/3/42}, eprint = {https://jfi.pm-research.com/content/15/3/42.full.pdf}, journal = {The Journal of Fixed Income} }