How Much of Corporate-Treasury Yield Spread is Due to Credit Risk?

57 Pages Posted: 15 Jan 2004 Last revised: 5 Oct 2012

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: September 12, 2012

Abstract

We show that credit risk accounts for only a small fraction of yield spreads for investment-grade bonds of all maturities, with the fraction lower for bonds of shorter maturities, and that it accounts for a much higher fraction of yield spreads for high yield bonds. This conclusion is shown to be robust across a wide class of structural models. We obtain such results by calibrating each of the models to be consistent with data on the historical default loss experience and equity risk premia, and demonstrating that different models predict similar credit risk premia under empirically reasonable parameter choices.

Keywords: Credit risk, credit spread puzzle, time varying risk premia, jumps and stochastic asset volatility

JEL Classification: G0, C0

Suggested Citation

Huang, Jing-Zhi and Huang, Ming, How Much of Corporate-Treasury Yield Spread is Due to Credit Risk? (September 12, 2012). Forthcoming in the Review of Asset Pricing Studies; 14th Annual Conference on Financial Economics and Accounting (FEA); Texas Finance Festival; 2003 Western Finance Association Meetings. Available at SSRN: https://ssrn.com/abstract=307360 or http://dx.doi.org/10.2139/ssrn.307360

Jing-Zhi Jay Huang (Contact Author)

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Ming Huang

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-225-9594 (Phone)

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