Date of Award
Doctor of Philosophy (PhD)
This dissertation comprises two essays on credit risk correlation. In the first essay, we provide robust empirical evidence that lenders charge higher loan spreads to borrowers with higher credit risk correlation. This effect is concentrated in investment grade firms, driven by tightening lending conditions, and more pronounced for firms with higher rollover risk. Furthermore, banks whose borrowers have higher average credit risk correlation, have greater default risk themselves. In the second paper, we find that a trading strategy that buys high- and sells low-credit risk correlation stocks generates significant risk-adjusted expected return of about 121 bps per annum. Cross-sectional regressions show a positive and significant relationship between credit risk correlation and expected returns. This effect is driven by investment-grade firms, elevated when funding conditions tighten, stronger for firms facing rollover risk as well as for more competitive industries, while it is mitigated for more transparent industries and firms.
Osah, Theophilus Teye, "Two essays on credit risk correlation" (2023). Theses and Dissertations - UTRGV. 1382.