The Credit Spread Puzzle - Model-Free Evidence from a Natural Experiment

22 Pages Posted: 4 Aug 2020

See all articles by Catharina Claussen

Catharina Claussen

University of Muenster

Johannes Kriebel

University of Muenster

Andreas Pfingsten

University of Münster - Finance Center Münster

Date Written: June 30, 2020

Abstract

Prior literature mostly finds bond yield spreads to be insufficiently explained by credit risk (the 'credit spread puzzle'). Recently, Feldhütter and Schaefer (2018) and Bai et al. (2020) revived this debate. We utilize the removal of sovereign guarantees for savings banks and state banks in Germany as a unique natural experiment allowing model-free identification of the credit risk component. During a transition period of over ten years, bonds of the same issuer with and without credit risk could be directly compared. Interestingly, less than 20% of the yield spread is due to credit risk for these bonds.

Keywords: Credit Spread Puzzle, Credit Risk, Sovereign Guarantees, Model-Free Identification

JEL Classification: G12, G28, G21

Suggested Citation

Claussen, Catharina and Kriebel, Johannes and Pfingsten, Andreas, The Credit Spread Puzzle - Model-Free Evidence from a Natural Experiment (June 30, 2020). Available at SSRN: https://ssrn.com/abstract=3646166 or http://dx.doi.org/10.2139/ssrn.3646166

Catharina Claussen

University of Muenster ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

Johannes Kriebel (Contact Author)

University of Muenster ( email )

Universitätsstraße 14-16
Münster, D-48143
Germany

Andreas Pfingsten

University of Münster - Finance Center Münster ( email )

Universitätsstr. 14-16
Muenster, D-48143
Germany

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