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Is Default Event Risk Priced in Corporate Bonds?

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Author Info
Joost Driessen

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Abstract

This article provides an empirical decomposition of the default, liquidity, and tax factors that determine expected corporate bond returns. In particular, the risk premium associated with a default event is estimated. The intensity-based model is estimated using bond price data for 104 US firms and historical default rates. Significant risk premia on common intensity factors and important tax and liquidity effects are found. These components go a long way towards explaining the level of expected corporate bond returns. Adding a positive default event risk premium helps to explain the remaining error, although this premium cannot be estimated with high statistical precision. Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhi009
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 18 (2005)
Issue (Month): 1 ()
Pages: 165-195
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Handle: RePEc:oup:rfinst:v:18:y:2005:i:1:p:165-195

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