Systematic Credit Risk and Pricing for Fixed Income Instruments

Abstract

This paper analyzes the sensitivity to systematic credit risk and pricing in fixed income instruments and compares corporate bonds and asset securitizations. The paper finds cross-sectional variation of systematic credit risk given the same credit rating and a market premium for the systematic risk embedded in yield spreads. Therefore, credit ratings do not provide comprehensive information on the degree of systematic risk and investors are compensated for such differences in systematic risk after controlling for credit ratings and other risk characteristics.

Keywords: Corporate Bond, Credit Risk, Financial Crisis, Fixed Income, Pricing, Rating, Securitization, Systematic Risk, Yield Spread

JEL Classification: G20, G28, C51