The Fear of Credit Risk and the Spread Divided by Duration (SDD) Anomaly in Global Credit Markets

Abstract

I mathematically derive, economically motivate and empirically confirm a new anomaly in credit markets based on the premise that excessive fear of default leads to an undervaluation and overvaluation of credit and duration risk, respectively. To quantify this anomaly, I introduce a new value measure. The corresponding value premium is excessive and global in nature, leading to superior returns at similar levels of systematic risk across all major credit markets, all ratings, regions and industries. The anomaly prevails several robustness checks, cannot be explained by market opaqueness or liquidity arguments and due to its profound origins is likely sustainable.

Keywords: Factor Investing, Value, Risk Premium, Credit Market, Credit Risk, Credit Spread, Credit Anomaly

JEL Classification: G10, G12, G15, C38