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Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads

Hui Chen

Massachusetts Institute of Technology; National Bureau of Economic Research (NBER)

Yu Xu

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Jun Yang

Bank of Canada

August 4, 2013

We build a structural model to explain corporate debt maturity dynamics over the business cycle and their implications for the term structure of credit spreads. Longer-term debt helps lower firms' default risks while shorter-term debt reduces investors' exposures to liquidity shocks. The joint variations in default risks and liquidity frictions over the business cycle cause debt maturity to lengthen in economic expansions and shorten in recessions. The model predicts that firms with higher systematic risk exposures will choose longer debt maturity, and that this cross-sectional relation between systematic risk and debt maturity will be stronger when risk premium is high. It also shows that the pro-cyclical maturity dynamics induced by liquidity frictions can signi cantly amplify the impact of aggregate shocks on credit risk, with different effects across the term structure, and that maturity management is especially important in helping high-beta and high-leverage firms reduce the impact of a crisis event that shuts down long-term refinancing. Finally, we provide empirical evidence for the model predictions on both debt maturity and credit spreads.

Number of Pages in PDF File: 66

Keywords: credit risk, term structure, business cycle, maturity dynamics, liquidity

JEL Classification: E44, G12, G32, G33

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Date posted: March 21, 2012 ; Last revised: August 5, 2013

Suggested Citation

Chen, Hui and Xu, Yu and Yang, Jun, Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads (August 4, 2013). Available at SSRN: http://ssrn.com/abstract=2024329 or http://dx.doi.org/10.2139/ssrn.2024329

Contact Information

Hui Chen (Contact Author)
Massachusetts Institute of Technology ( email )
50 Memorial Drive
Cambridge, MA 02142
United States
617-324-3896 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Yu Xu
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
Cambridge, MA 02142-1347
United States
Jun Yang
Bank of Canada ( email )
234 Wellington Street
Ontario, Ottawa K1A 0G9
Feedback to SSRN

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