The aim of this paper is to provide preliminary evidence on the relationship between the exposure to systematic risk and default probabilities at the individual firm level.This is conducted by dynamically estimating the systematic risk with the Kalman Filter, which simultaneously measures the change in systematic risk by calculating the Kalman Gain.The default probability sorted portfolios exhibit higher correlation for the portfolios with higher default probability.This is consistent with the intuition that the increase in Kalman Gain is positively related to the increase in default probability (i.e. an increase in volatility).
直哉 竹澤 (Mon,) studied this question.