Corporate Bond Default Risk: A 150-Year Perspective
Stanford University - Management Science & Engineering
Francis A. Longstaff
University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)
Stephen M. Schaefer
London Business School - Institute of Finance and Accounting
Ilya A. Strebulaev
Stanford University - Graduate School of Business; National Bureau of Economic Research
NBER Working Paper No. w15848
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 percent of the par value of the entire corporate bond market. We examine whether corporate default rates are best forecast by structural, reduced-form, or macroeconomic credit models and find that variables suggested by structural models outperform the others. Default events are only weakly correlated with business downturns. We find that 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.
Number of Pages in PDF File: 46working papers series
Date posted: March 29, 2010
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