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Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market, previously titled: "The Credit-Default Swap Market: Is Credit Protection Priced Correctly?"

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  • Longstaff, Francis A.
  • Mithal, Sanjay
  • Neis, Eric

Abstract

We use the information in credit-default swaps to obtain direct measures of the size of the default and nondefault components in corporate spreads. We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the definition of the riskless curve. We also find that the nondefault component is time varying and strongly related to measures of bond-specific illiquidity as well as to macroeconomic measures of bond-market liquidity.

Suggested Citation

  • Longstaff, Francis A. & Mithal, Sanjay & Neis, Eric, 2004. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market, previously titled: "The Credit-Default Swap Market: Is Credit Protection Priced Correctly?&qu," University of California at Los Angeles, Anderson Graduate School of Management qt8gn7h03k, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt8gn7h03k
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    References listed on IDEAS

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