Correlations in Global Credit Markets

Mar 1, 2005

The findings of this study highlight a number of implications for managing credit portfolios. We have observed that the investment-grade vs. high-yield distinctions should be made when assessing correlations and credit risk diversification. As spreads on speculative instruments tend to be dominated by issuer specific factors rather than market-specific factors, bonds from the same issuer in different markets tend to be highly correlated; bond correlations across markets for high-grade issuers tend to be less highly correlated. In general, the lower the credit quality, the higher the cross-currency linkage.