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The corporate bond credit spread puzzle

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  • Jens Christensen

Abstract

It is common to view interest on a corporate bond as reflecting the risk-free, longer-term interest rate, such as that on a 10-year Treasury bond, plus a spread related to the credit risk of the corporation issuing the bond. However, empirical analysis of the determinants of corporate bond rates has turned out to be more demanding than it appears on the surface. This has led researchers to talk about a credit spread puzzle. In this Economic Letter we will first detail the evidence for the existence of such a credit spread puzzle. In a second step we will take a closer look at some of the pieces that go into explaining the puzzle.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal FRBSF Economic Letter.

Volume (Year): (2008)
Issue (Month): mar14 ()
Pages:

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Handle: RePEc:fip:fedfel:y:2008:i:mar14:n:2008-10

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Keywords: Corporate bonds;

References

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  1. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
  2. Houweling, Patrick & Mentink, Albert & Vorst, Ton, 2005. "Comparing possible proxies of corporate bond liquidity," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(6), pages 1331-1358, June.
  3. Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, American Finance Association, vol. 53(6), pages 2225-2241, December.
  4. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, American Finance Association, vol. 56(1), pages 247-277, 02.
  5. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2177-2207, December.
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Cited by:
  1. Markus Hoermann & Andreas Schabert, 2013. "A Monetary Analysis of Balance Sheet Policies," Working Paper Series in Economics, University of Cologne, Department of Economics 68, University of Cologne, Department of Economics.

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