Credit Information Ambiguity Premia

57 Pages Posted: 7 Jan 2019 Last revised: 9 Aug 2022

See all articles by Hwagyun Kim

Hwagyun Kim

Texas A&M University - Mays Business School

Ju Hyun Kim

Ajou University, School of Business

Heungju Park

Sungkyunkwan University - SKK Business School

Date Written: August 8, 2022

Abstract

This paper proposes credit information ambiguity (CIA) as a pricing factor. We recursively estimate CIA as the statistical proximity of predicted firm survival probabilities of major credit rating agencies, using credit ratings and historical default rates. The CIA factor positively and significantly explains expected bond returns, predicting around 15% of bond return premia. A multi-factor model capturing the cross-section of CIA, credit rating, and downside risk consistently prices average corporate bond returns. The results remain robust to alternate specifications and multiple hypothesis testing. CIA also predicts CDS spreads and stock returns. A model using uncertainty aversion justifies the results.

Keywords: Credit Information Ambiguity, Bond Uncertainty Premia, Return Predictability

JEL Classification: G12, G14, G24

Suggested Citation

Kim, Hwagyun and Kim, Ju Hyun and Park, Heungju, Credit Information Ambiguity Premia (August 8, 2022). Available at SSRN: https://ssrn.com/abstract=3305605 or http://dx.doi.org/10.2139/ssrn.3305605

Hwagyun Kim (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4218
United States

Ju Hyun Kim

Ajou University, School of Business ( email )

Woncheon-dong, Yeongtong-gu
Suwon-si, Gyeonggi-do
Suwon
Korea, Republic of (South Korea)

Heungju Park

Sungkyunkwan University - SKK Business School ( email )

Seoul
Korea, Republic of (South Korea)

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