Pandemic Exposure, Credit Market Reactions, and Corporate Default Risk
60 Pages Posted: 12 Oct 2020 Last revised: 1 Jun 2021
Date Written: May 21, 2021
We develop a theoretical model quantifying how firm-level pandemic exposure and sentiment, as informational shocks, affect a firm’s credit spread and default risk. Consistent with model predictions, we find significantly positive impacts on single-name credit default swap (CDS) spreads from both pandemic exposure and negative pandemic sentiment. As the model predicts, the empirical results also show that the positive sentiment has a negative impact on the CDS spreads only when the sentiment becomes more informative. In addition, firm-level pandemic risk reduces CDS spread slope and increases credit spread volatility, indicating that pandemic risk tends to manifests as short-term shock that results in short term credit spreads trading higher relative to longer term credit spreads and more uncertainty around credit status.
Keywords: Pandemic risk, informational friction, economic shock, credit default swap spread, default risk
JEL Classification: G10, G12, G14, G24, G32
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