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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26484
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| Title: | How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk? |
| Authors: | Huang, Jing-zhi
Huang, Ming |
| Issue Date: | Oct-2002 |
| Series/Report no.: | FIN-02-040 |
| Abstract: | We show that credit risk accounts for only a small fraction of the
observed corporate-Treasury yield spreads for investment grade bonds of
all maturities, with the fraction smaller for bonds of shorter
maturities; and that it accounds for a much higher fraction of yield
spreads for junk bonds. This conclusion is shown to be robust across a
wide class of structural models-both existing and new ones-that
incorporate many different economic considerations. We obtain such
consistent results by calibrating each of the models to be consistent
with data on historical default loss experience. Different models, which
in theory can still generate a very large range of credit risk premia,
are shown to predict fairly similar credit risk premia under empirically
reasonable parameter choices, resulting in the robustness of our conclusions. |
| URI: | http://hdl.handle.net/2451/26484 |
| Appears in Collections: | Finance Working Papers
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