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Default Risk in Corporate Yield Spreads

  • Georges Dionne
  • Geneviève Gauthier
  • Khemais Hammami
  • Mathieu Maurice
  • Jean-Guy Simonato

"An important research question examined in the credit risk literature focuses on the proportion of corporate yield spreads attributed to default risk. This topic is reexamined in light of the different issues associated with the computation of default probabilities obtained from historical default data. We find that the estimated default risk proportion in corporate yield spreads is sensitive to the ex ante estimated term structure of default probabilities used as inputs. This proportion can become a large fraction of the spread when sensitivity analyses are made with respect to the period over which the probabilities are estimated and the recovery rates." Copyright (c) 2010 Financial Management Association International.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1755-053X.2010.01089.x
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Article provided by Financial Management Association International in its journal Financial Management.

Volume (Year): 39 (2010)
Issue (Month): 2 (06)
Pages: 707-731

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Handle: RePEc:bla:finmgt:v:39:y:2010:i:2:p:707-731
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  10. Mark J Manning, 2004. "Exploring the relationship between credit spreads and default probabilities," Bank of England working papers 225, Bank of England.
  11. Darrell Duffie & Robert Jarrow & Amiyatosh Purnanandam & Wei Yang, 2003. "Market Pricing of Deposit Insurance," Journal of Financial Services Research, Springer, vol. 24(2), pages 93-119, October.
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