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US Corporate Bond Yield Spread: A default risk debate

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  • SHAH, Syed Muhammad Noaman Ahmed
  • KEBEWAR, mazen

Abstract

According to theoretical models of valuing risky corporate securities, risk of default is primary component in overall yield spread. However, sizable empirical literature considers it otherwise by giving more importance to non-default risk factors. Current study empirically attempts to provide relative solution to this conundrum by presuming that problem lies in the subjective empirical treatment of default risk. By using post-hoc estimator approach of Lubotsky & Wittenberg (2006), we construct an efficient indicator for risk of default, by using sample of 252 US non-financial corporate data (2000-2010). On average, our results validate that almost 48% of change in yield spread is explained by default risk especially in recent financial crisis period (2007-2009). Hence, our results relatively suggest that potential problem lies in the ad-hoc measurement methods used in existing empirical literature

Suggested Citation

  • SHAH, Syed Muhammad Noaman Ahmed & KEBEWAR, mazen, 2013. "US Corporate Bond Yield Spread: A default risk debate," MPRA Paper 44887, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:44887
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    File URL: https://mpra.ub.uni-muenchen.de/44887/1/MPRA_paper_44887.pdf
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    References listed on IDEAS

    as
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    5. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
    6. Rohan Churm & Nikolaos Panigirtzoglou, 2005. "Decomposing credit spreads," Bank of England working papers 253, Bank of England.
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    13. Tang, Dragon Yongjun & Yan, Hong, 2010. "Market conditions, default risk and credit spreads," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 743-753, April.
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    More about this item

    Keywords

    Default risk; credit spread; risk-aversion; measurement error; index construction;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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