The Global Credit Spread Puzzle

88 Pages Posted: 24 Sep 2019 Last revised: 19 Jan 2020

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Yoshio Nozawa

Hong Kong University of Science and Technology

Zhan Shi

Tsinghua University - PBC School of Finance

Date Written: September 15, 2019

Abstract

Using security-level credit spread data in eight developed economies, we document a large cross-country difference in credit spreads conditional on credit ratings and other default risk measures. The standard benchmark structural models not only have difficulty matching credit spreads but also fail to explain the cross-country variation in spreads as well as the dynamic behavior of credit spreads. Since this cross-country variation is positively related to illiquidity measures, we implement an extended structural model that incorporates endogenous liquidity in the secondary market, and find that this model largely explains credit spreads in cross sections and over time. Therefore, default risk itself unlikely explains corporate credit spreads.

Keywords: Corporate credit spreads, Credit spread puzzle, Structural credit risk models, Merton model, Black and Cox model, CDS, Fixed income asset pricing

JEL Classification: G12, G13

Suggested Citation

Huang, Jing-Zhi Jay and Nozawa, Yoshio and Shi, Zhan, The Global Credit Spread Puzzle (September 15, 2019). Available at SSRN: https://ssrn.com/abstract=3453959 or http://dx.doi.org/10.2139/ssrn.3453959

Jing-Zhi Jay Huang

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

University Park, PA 16802
United States

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

Yoshio Nozawa (Contact Author)

Hong Kong University of Science and Technology ( email )

Clearwater Bay Road
Sai Kun, NT
Hong Kong

Zhan Shi

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing, 100083
China
86-10-62780862 (Phone)

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