Abstract
This paper studies how corporate bond spreads vary with the business cycle.
I show that both level and slope of empirical credit spread curves are correlated
with the state of the economy, and I link this to variation in idiosyncratic jump
risk. I develop a structural credit risk model that accounts for both business cycle
and jump risk, and show by estimation that the model captures the counter-cyclical level and pro-cyclical slope of empirical credit spread curves. In addition, I provide a new procedure for estimation of idiosyncratic jump risk, which is consistent with observed shocks to firm fundamentals.
I show that both level and slope of empirical credit spread curves are correlated
with the state of the economy, and I link this to variation in idiosyncratic jump
risk. I develop a structural credit risk model that accounts for both business cycle
and jump risk, and show by estimation that the model captures the counter-cyclical level and pro-cyclical slope of empirical credit spread curves. In addition, I provide a new procedure for estimation of idiosyncratic jump risk, which is consistent with observed shocks to firm fundamentals.
| Original language | English |
|---|---|
| Publication date | 2012 |
| Number of pages | 60 |
| Publication status | Published - 2012 |
| Event | The 39th European Finance Association Annual Meeting (EFA 2012) - Copenhagen Business School, Frederiksberg, Denmark Duration: 15 Aug 2012 → 18 Aug 2012 Conference number: 39 http://www.efa2012.org/ |
Conference
| Conference | The 39th European Finance Association Annual Meeting (EFA 2012) |
|---|---|
| Number | 39 |
| Location | Copenhagen Business School |
| Country/Territory | Denmark |
| City | Frederiksberg |
| Period | 15/08/2012 → 18/08/2012 |
| Internet address |