Credit Spreads Across the Business Cycle

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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.
Original languageEnglish
Publication date2012
Number of pages60
Publication statusPublished - 2012
EventThe 39th European Finance Association Annual Meeting (EFA 2012) - Copenhagen Business School, Frederiksberg, Denmark
Duration: 15 Aug 201218 Aug 2012
Conference number: 39


ConferenceThe 39th European Finance Association Annual Meeting (EFA 2012)
LocationCopenhagen Business School
Internet address

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