Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market
Francis A. Longstaff
University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)
University of California, Los Angeles (UCLA) - Anderson School of Management
NBER Working Paper No. w10418
We use the information in credit-default swaps to obtain direct measures of the size of the default and nondefault components in corporate spreads. We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the definition of the riskless curve. We also find that the nondefault component is time varying and strongly related to measures of bond-specific illiquidity as well as to macroeconomic measures of bond-market liquidity.
Number of Pages in PDF File: 51working papers series
Date posted: April 21, 2004
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