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Corporate bond default risk: A 150-year perspective

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  • Giesecke, Kay
  • Longstaff, Francis A.
  • Schaefer, Stephen
  • Strebulaev, Ilya
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    Abstract

    We study corporate bond default rates using an extensive new data set spanning the 1866–2008 period. We find that the corporate bond market has repeatedly suffered clustered default events much worse than those experienced during the Great Depression. For example, during the railroad crisis of 1873–1875, total defaults amounted to 36% of the par value of the entire corporate bond market. Using a regime-switching model, we examine the extent to which default rates can be forecast by financial and macroeconomic variables. We find that stock returns, stock return volatility, and changes in GDP are strong predictors of default rates. Surprisingly, however, credit spreads are not. Over the long term, credit spreads are roughly twice as large as default losses, resulting in an average credit risk premium of about 80 basis points. We also find that credit spreads do not adjust in response to realized default rates.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 102 (2011)
    Issue (Month): 2 ()
    Pages: 233-250

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    Handle: RePEc:eee:jfinec:v:102:y:2011:i:2:p:233-250

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Default rates; Bankruptcy; Credit spreads; Credit risk premium;

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    Cited by:
    1. Francois Gourio, 2011. "Credit Risk and Disaster Risk," NBER Working Papers 17026, National Bureau of Economic Research, Inc.
    2. Adrien Verdelhan & Nicola Borri, 2010. "Sovereign Risk Premia," 2010 Meeting Papers 1122, Society for Economic Dynamics.
    3. Andras Danis, 2013. "Do Empty Creditors Matter? Evidence from Distressed Exchange Offers," IEHAS Discussion Papers 1334, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    4. Andrew Ang & Francis A. Longstaff, 2011. "Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe," NBER Working Papers 16982, National Bureau of Economic Research, Inc.
    5. Elias Albagli & Christian Hellwig & Aleh Tsyvinski, 2014. "Dynamic Dispersed Information and the Credit Spread Puzzle," NBER Working Papers 19788, National Bureau of Economic Research, Inc.
    6. Nada Mora, 2013. "Creditor recovery: the macroeconomic dependence of industry equilibrium," Research Working Paper RWP 13-06, Federal Reserve Bank of Kansas City.
    7. Matthias Fleckenstein & Francis A. Longstaff & Hanno Lustig, 2013. "Deflation Risk," NBER Working Papers 19238, National Bureau of Economic Research, Inc.
    8. Dong, Yinghui & Yuen, Kam C. & Wu, Chongfeng, 2014. "Unilateral counterparty risk valuation of CDS using a regime-switching intensity model," Statistics & Probability Letters, Elsevier, vol. 85(C), pages 25-35.
    9. Georges Dionne & Olfa Maalaoui Chun, 2013. "Default and Liquidity Regimes in the Bond Market during the 2002-2012 Period," Cahiers de recherche 1322, CIRPEE.
    10. Daniel C. Hardy & Christian Schmieder, 2013. "Rules of Thumb for Bank Solvency Stress Testing," IMF Working Papers 13/232, International Monetary Fund.
    11. Priyank Gandhi & Hanno Lustig, 2010. "Size Anomalies in U.S. Bank Stock Returns: A Fiscal Explanation," NBER Working Papers 16553, National Bureau of Economic Research, Inc.
    12. Xu, Xin, 2013. "Forecasting Bankruptcy with Incomplete Information," MPRA Paper 55024, University Library of Munich, Germany, revised 31 Mar 2014.

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