Pandemic Exposure, Credit Market Reactions, and Corporate Default Risk

60 Pages Posted: 12 Oct 2020 Last revised: 1 Jun 2021

See all articles by Michael B. Imerman

Michael B. Imerman

Claremont Colleges - Peter F. Drucker Graduate School of Management

Xiaoxia Ye

University of Liverpool Management School

Ran Zhao

Claremont Graduate University, Drucker School of Management

Date Written: May 21, 2021

Abstract

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

Suggested Citation

Imerman, Michael B. and Ye, Xiaoxia and Zhao, Ran, Pandemic Exposure, Credit Market Reactions, and Corporate Default Risk (May 21, 2021). Available at SSRN: https://ssrn.com/abstract=3709218 or http://dx.doi.org/10.2139/ssrn.3709218

Michael B. Imerman

Claremont Colleges - Peter F. Drucker Graduate School of Management ( email )

The Drucker School of Management
1021 North Dartmouth Avenue
Claremont, CA 91711
United States
909-607-3310 (Phone)

Xiaoxia Ye

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Ran Zhao (Contact Author)

Claremont Graduate University, Drucker School of Management ( email )

150 E. Tenth Street
Claremont, CA 91711
United States

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