Abstract
Yes we do. This paper shows that any firm's credit risk is, to a very large extent, driven by common risk factors affecting all firms. Using a reduced form model and sequential Kalman filtering estimation we decompose the credit risk of a sample of corporate bonds (14 US firms, 2001-2003) into different unobservable risk factors. A single common factor accounts for more than 50% of all (but two) of the firms' credit risk levels, with an average of 68% across firms. Such factor represents the credit risk levels underlying the US economy and is strongly correlated with main US stock indexes.
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