Zhou, Chunsheng, "An Analysis of Default Correlations and Multiple Defaults", Review of Financial Studies, Vol. 14, No. 2, (January 2001), pp. 555-576.
Abstract: Evaluating default correlations or the probabilities of default by more than one firm is an important task in credit analysis, derivatives pricing, and risk management. However, default correlations cannot be measured directly, multiple-default modeling is technically difficult, and most existing credit models cannot be applied to analyze multiple defaults. This article develops a first-passage-time model, providing an analytical formula for calculating default correlations that is easily implemented and conveniently used for a variety of financial applications. The model also provides a theoretical justification for several empirical regularities in the credit risk literature. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, Review of Financial Studies.