Abstract
The dynamics of debt are crucial in structural models of credit risk, and this paper provides a theoretical and empirical examination of these dynamics. Empirically, the future level of debt in US industrial firms is negatively related to current leverage. Furthermore, when a firm experiences a negative shock to it’s equity, debt increases in the short run but declines in the long run, relative to a positive-shock firm. We incorporate these dynamics of debt into a structural model of credit risk and compare the term structure of default rates and credit spreads with those in existing models. The model improves the ability to capture the level of credit spreads, particularly at short maturities.
| Original language | English |
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| Publication date | 2020 |
| Number of pages | 70 |
| Publication status | Published - 2020 |
| Event | The 55th Annual Conference of the Western Finance Association. WFA 2020 - Virtual Duration: 19 Jun 2020 → 22 Jun 2020 Conference number: 55 https://westernfinance.org/wp-content/uploads/2020_links.pdf |
Conference
| Conference | The 55th Annual Conference of the Western Finance Association. WFA 2020 |
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| Number | 55 |
| Location | Virtual |
| Period | 19/06/2020 → 22/06/2020 |
| Internet address |
Keywords
- Structural models
- Debt levels
- Default rates
- Default boundary
- Credit risk