Default Correlation and Bond Portfolio Management

Abstract

In this paper we examine the effect of default correlation on the price, duration and convexity of a bond portfolio. We use Clayton copula and t copula to characterize the default dependence structure. Our main result shows that, under these two types of default dependence structure, while the marginal distribution of time to default is an important determinant, the price, duration and convexity of a bond portfolio obtained from the joint default approach are insensitive to the default dependence structure.