Option-Based Credit Spreads

American Economic Review - Tập 108 Số 2 - Trang 454-488 - 2018
Christopher L. Culp1, Yoshio Nozawa2, Pietro Veronesi3
1Johns Hopkins Institute for Applied Economics, 3400 North Charles Street, Gilman Hall, Room 301, Baltimore, MD 21218, and Swiss Finance Institute (email: )
2Federal Reserve Board, 20th and C Street NW, Washington, DC 20551 (email: )
3Booth School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, IL 60637, NBER, and CEPR (email: )

Tóm tắt

We present a novel empirical benchmark for analyzing credit risk using “pseudo firms” that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo firm assets. Empirically, like corporate spreads, pseudo bond spreads are large, countercyclical, and predict lower economic growth. Using this framework, we find that bond market illiquidity, investors' overestimation of default risks, and corporate frictions do not seem to explain excessive observed credit spreads but, instead, a risk premium for tail and idiosyncratic asset risks is the primary determinant of corporate spreads. (JEL E23, E32, E44, G13, G24, G32)

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Thông tin xuất bản

American Economic Review

Tập 108 Số 2

454-488

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