Credit risk correlation and the cost of bank loans

Authors

Siamak Javadi, The University of Texas Rio Grande Valley
Theophilus T. Osah, The University of Texas Rio Grande Valley

Document Type

Article

Publication Date

6-27-2024

Abstract

Using several approaches to compute firms’ credit risk correlation, we provide robust empirical evidence that lenders charge higher loan spreads to borrowers with higher credit risk correlation. Consistent with the theoretical literature, we find that the credit risk correlation effect is concentrated in investment-grade firms, driven by tightening lending conditions, and more pronounced for firms with higher rollover risk. We also show that banks whose borrowers have higher average credit risk correlation, have greater default risk themselves. Overall, our results indicate that banks view credit risk correlation as an important risk factor.

Comments

Original published version available at

https://doi.org/10.1111/fima.12467

Publication Title

Financial Management

DOI

https://doi.org/10.1111/fima.12467

Recommended Citation

Javadi, S., & Osah, T. (2024). Credit risk correlation and the cost of bank loans. Financial Management, 1–38. https://doi.org/10.1111/fima.12467