Default correlation: An empirical investigation of a subprime lender [An article from: Journal of Banking and Finance]

This digital document is a journal article from Journal of Banking and Finance, published by Elsevier in 2004. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
In recent years, subprime lending has grown substantially as an important sector of the credit markets. This paper is concerned with the risk management of subprime loan portfolios and the importance of default correlation in measuring that risk. Using a large portfolio of residential subprime loans from an anonymous subprime lender, we show that default correlation is substantial for this lender. In particular, the significance of default correlation increases as the internal credit rating declines. Our results suggest that lenders and regulators would be well served investing in the understanding of default correlation in subprime portfolios.