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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

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.

Suggested Citation

  • Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
  • Handle: RePEc:eee:jfinec:v:102:y:2011:i:2:p:233-250
    DOI: 10.1016/j.jfineco.2011.01.011
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    More about this item

    Keywords

    Default rates; Bankruptcy; Credit spreads; Credit risk premium;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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