The previous studies on coskewness and cokurtosis between assets concentrate on the effects of coskewness and cokurtosis on the returns and prices of financial assets. This paper explores the default correlation in the presence of coskewness and cokurtosis between two firm values. In doing so, we extend the structural model of Merton (1974) to incorporate coskewness and cokurtosis. We can observe some findings as follows. First, there are no significant effects of skewness and kurtosis associated with each individual firm return on default correlation. Second, the lower coskewness (or the higher cokurtosis) is, the larger default correlations are. But we can observe the opposite result for the firms with low credit rating as the maturity gets longer.
Research Article|
May 31 2010
Default Correlations in the Presence of Coskewness and Cokurtosis Between Two Firm Values
Publisher: Emerald Publishing on behalf of Korea Derivatives Association
Online ISSN: 2713-6647
Print ISSN: 1229-988X
© 2010 Emerald Publishing Limited
2010
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Journal of Derivatives and Quantitative Studies: Seonmul yeon’gu (2010) 18 (2): 1–17.
Citation
Kim H, Bae K (2010), "Default Correlations in the Presence of Coskewness and Cokurtosis Between Two Firm Values". Journal of Derivatives and Quantitative Studies: Seonmul yeon’gu, Vol. 18 No. 2 pp. 1–17, doi: https://doi.org/10.1108/JDQS-02-2010-B0001
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