US Corporate Bond Yield Spread. A default risk debate

Preprint

According to theoretical models of valuing risky corporate securities, risk of default is primary component in overall yield spread. However, sizable empirical literature considers it otherwise by giving more importance to non-default risk factors. Current study empirically attempts to provide relative solution to this conundrum by presuming that problem lies in the subjective empirical treatment of default risk. By using post-hoc estimator approach of Lubotsky & Wittenberg (2006), we construct an efficient indicator for risk of default, by using sample of 252 US non-financial corporate data (2000-2010). On average, our results validate that almost 48% of change in yield spread is explained by default risk especially in recent financial crisis period (2007-2009). Hence, our results relatively suggest that potential problem lies in the ad-hoc measurement methods used in existing empirical literature.

Object Details

• Language: Englisch

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models; Multiple Variables: General ; Asset Pricing; Trading Volume; Bond Interest Rates ; Information and Market Efficiency; Event Studies; Insider Trading
• Subject: Default risk ; Credit spread ; Risk-aversion ; Measurement error ; Index construction

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Shah, Syed Noaman ; Kebewar, Mazen
• Event: Veröffentlichung
• (who): ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
• (where): Kiel und Hamburg
• (when): 2013-03-08

Further information

• Handle: http://hdl.handle.net/10419/73690
• Last update: 10.03.2025, 11:45 AM CET