Can Equity Volatility Explain the Global Loan Pricing Puzzle?
Office of the Comptroller of the Currency
EPFL- Chair of International Finance
January 11, 2013
In this paper we hypothesize that unobservable differences in firm volatility are responsible for the difference in syndicated corporate loan spreads paid by U.S. and European firms. To explore this hypothesis, we examine whether equity volatility, an error prone measure of firm volatility in financial markets, can explain the difference in syndicated corporate loan spreads paid by U.S. and European borrowers. We argue that controlling for equity volatility in OLS regressions will result in biased and inconsistent estimates of the difference in U.S. and European loan spreads because the error in measuring firm volatility with equity volatility will produce biased and inconsistent coefficient estimates for any variable correlated with firm volatility. Therefore, we use instrumental variables methods to solve the measurement error problem and identify consistent estimates of the difference in U.S. and European loan spreads. In our instrumental variable results, we find no statistically significant difference in U.S. and European loan spreads.
Number of Pages in PDF File: 90
Keywords: syndicated loans, equity volatility, loan spread
JEL Classification: E40, G12, G15, G21working papers series
Date posted: March 19, 2012 ; Last revised: January 15, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.516 seconds