Abstract
Are standard structural models able to explain credit spreads on corporate bonds? In contrast to much of the literature, we find that the Black-Cox model matches the level of investment-grade spreads well. Model spreads for speculative-grade debt are too low, and we find that bond illiquidity contributes to this underpricing. Our analysis makes use of a new approach for calibrating the model to historical default rates that leads to more precise estimates of investment-grade default probabilities.
Original language | English |
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Journal | Review of Financial Studies |
Volume | 31 |
Issue number | 8 |
Pages (from-to) | 2897-2942 |
Number of pages | 46 |
ISSN | 0893-9454 |
DOIs | |
Publication status | Published - Aug 2018 |
Keywords
- Asset pricing
- Trading volume
- Bond interest rates
- Panel data models
- Spatio-temporal models
- Contingent pricing
- Futures pricing