Review of Financial Studies Vol. 31 No. 8 2018
The Myth of the Credit Spread Puzzle
open access
Abstract
Are standard structural models able to explain credit spreads on corporate bonds? In contrast to much of the literature, we find that the Black-Cox model matches the level of investment-grade spreads well. Model spreads for speculative-grade debt are too low, and we find that bond illiquidity contributes to this underpricing. Our analysis makes use of a new approach for calibrating the model to historical default rates that leads to more precise estimates of investment-grade default probabilities. Received October 25, 2016; editorial decision January 12, 2018 by Editor Andrew Karolyi.
- DOI
- 10.1093/rfs/hhy032
- Volume
- 31
- Issue
- 8
- Pages
- 2897-2942
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex