This dissertation explores the various ways in which correlated phenomena relate to default risk. More specifically, I explore the connection between credit-default risk and the dependencies and cross-correlations arising in collections of assets. In Chapter (4), building upon previous work by Grune and Semmler (2005), using company-specific endogenous risk premia, I explain how exposure to risk impacts asset value. I extend these results to study the effects of random shocks to diversified capital assets, wherein the shocks are correlated to varying degrees. Using a numerical dynamic decision approach, I show the impact of varying dependency structures on the over-all default rate. In Chapter (5), I take note of the advent of securitization products; those products have brought the issue of default correlation to the center of finance. Using several computational methods, thus allowing different dimensions of phenomena to be treated in the most appropriate way, I extend the results of Chapter (4) to apply to the recent sub-prime and credit crises. Using a regime-shift approach to explain certain dramatic features of these phenomena, I replicate synthetic structures and use Monte Carlo simulation and a Cholesky reduction approach to explore such issues contagion and default correlation. Lastly I investigate policy decisions and find that it has only limited efficacy---concluding that issues of asymmetric information are key to the safe administration of structured products.
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