Abstract

http://ssrn.com/abstract=1800212
 
 

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Value Investing in Credit Markets


Maria M. Correia


London Business School

Scott A. Richardson


London Business School; AQR Capital Management, LLC

A. Irem Tuna


London Business School

March 31, 2011

Review of Accounting Studies, Vol. 17, No. 3, 2012

Abstract:     
We outline a parsimonious empirical model to assess the relative usefulness of accounting and equity market based information to explain corporate credit spreads. The primary determinant of corporate credit spreads is the physical default probability. We compare existing accounting-based and market-based models to forecast default, and find that a modified structural model with accounting and market inputs is best able to forecast default and explain cross-sectional variation in credit spreads. We then assess whether the credit market completely incorporates this default information into credit spreads. Interestingly, we find that credit spreads reflect information about forecasted default rates with a significant lag. This evidence is suggestive of a role for value investing in credit markets.

Number of Pages in PDF File: 67

Keywords: credit markets, CDS, bonds, default prediction

JEL Classification: G12, G14, M41

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Date posted: April 4, 2011 ; Last revised: October 16, 2012

Suggested Citation

Correia, Maria M. and Richardson, Scott A. and Tuna, A. Irem, Value Investing in Credit Markets (March 31, 2011). Review of Accounting Studies, Vol. 17, No. 3, 2012. Available at SSRN: http://ssrn.com/abstract=1800212 or http://dx.doi.org/10.2139/ssrn.1800212

Contact Information

Maria M. Correia
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
Scott Anthony Richardson (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
Ayse Irem Tuna
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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