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

Journal of Financial Economics, Forthcoming

67 Pages Posted: 21 Mar 2012 Last revised: 27 Feb 2020

See all articles by Hui Chen

Hui Chen

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

Yu Xu

The University of Hong Kong - Faculty of Business and Economics

Jun Yang

Bank of Canada

Multiple version iconThere are 2 versions of this paper

Date Written: February 25, 2020

Abstract

We document several facts about corporate debt maturity: (1) debt maturity is pro-cyclical; (2) higher-beta firms tend to have longer debt maturity; (3) shorter maturity amplifies the sensitivity of credit spreads to aggregate shocks. We build a dynamic capital structure model that explains these facts. In the model, leverage and maturity choices are highly interdependent, which reflects the tradeoffs of liquidity discounts of long-term debt, repayment risks of short-term debt, and the benefit of short-term debt as a commitment device for timely leverage adjustments. Additionally, the model quantifies the effects of maturity dynamics on the term structure of credit spreads.

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

JEL Classification: E32, G12, G32, G33

Suggested Citation

Chen, Hui and Xu, Yu and Yang, Jun, Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads (February 25, 2020). Journal of Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2024329 or http://dx.doi.org/10.2139/ssrn.2024329

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

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Jun Yang

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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