An analysis of default correlations and multiple defaults

Evaluating default correlations or the probabilities of default by more tha n one firm is an important task in credit analysis, derivatives pricing, an d risk management. However, default correlations cannot be measured directl y, multiple-default modeling is technically difficult, and most existing cr edit models cannot be applied to analyze multiple defaults. This article de velops a first-passage-time model, providing an analytical formula for calc ulating default correlations that is easily implemented and conveniently us ed for a variety of financial applications. The model also provides a theor etical justification for several empirical regularities in the credit risk literature.