ABSTRACT
Contents 10.1 Extended Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195 10.2 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .198 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199
A defaults cluster is illustrated in Figure 10.1.1, which shows the default history among Moody’s rated U.S. issuers between 1970 and 2005. The clustering is driven by firm sensitivity to common economic factors, but it can also come from the feedback of an individual firm event to the aggregate level. A single default often results in the widening of credit spreads across the board. This phenomenon is empirically documented in Jorion and Zhang (2006) and exemplified in Figure 10.1.2, which shows the impact of Delphi’s default and GM’s announcement of a huge quarterly loss on the spread of the Dow Jones CDX North America Crossover Index swap.
