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Has CRMW lowered the cost of corporate debt? A structural credit risk model

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  • Liu, Ying
  • Wang, Xi

Abstract

We develop a structural credit risk model by incorporating three features of Credit Risk Mitigation Warrant (CRMW): specific protection, targeted guidance, and actual implementation. The model quantifies CRMW’s effect on credit spreads under systematic and idiosyncratic shocks. Results show that CRMW: (1) reduces credit spreads by raising default boundaries, with stronger effects under idiosyncratic shocks; (2) exhibits pro-cyclical feature that amplifies spread volatility; (3) is outperformed by fiscal bailouts under systematic risk, while its signaling effect mitigates adverse selection. This paper provides valuable insights into CRMW’s credit risk management mechanisms and effects.

Suggested Citation

  • Liu, Ying & Wang, Xi, 2026. "Has CRMW lowered the cost of corporate debt? A structural credit risk model," Journal of Economic Dynamics and Control, Elsevier, vol. 183(C).
    • Handle: RePEc:eee:dyncon:v:183:y:2026:i:c:s0165188925002052
    DOI: 10.1016/j.jedc.2025.105239
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    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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