Journal of Banking & Finance Vol. 20 No. 2 1996
Risk aversion and the yield of corporate debt
open access
Abstract
This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying risk premium associated with the investor's risk aversion. The results of nonlinear regressions indicate that previous risk-neutrality models consistently overestimate the implied default rates of corporate bonds. The results also suggest that investors may have been adequately compensated for investment in risky bonds.
- DOI
- 10.1016/0378-4266(94)00099-9
- Volume
- 20
- Issue
- 2
- Pages
- 267-281
- Language
- en
- Sources
- openalex crossref