Extrapolation and Cognitive Dissonance in the Market for Credit Risk

62 Pages Posted: 14 Dec 2020

See all articles by Arben Kita

Arben Kita

University of Southampton

Date Written: December 1, 2020

Abstract

A measure of heterogeneous beliefs based on the high-frequency credit market information is associated with an increase in the firm's debt issuance and investments and a decrease in the cost of debt the following month. Inferring an elevated credit-market belief as investors' optimistic outlook on firms' prospects predicts future credit returns. Expectations move with the leverage ("moneyness") levels and correlate with risk factors. The existence of predictable mean reversion in credit market conditions reinforces these results.

Keywords: Extrapolation, Cognitive Dissonance, CDS, Sentiment, Jumps, High Frequency Data

JEL Classification: E44, G12, G30, G40

Suggested Citation

Kita, Arben, Extrapolation and Cognitive Dissonance in the Market for Credit Risk (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3740487 or http://dx.doi.org/10.2139/ssrn.3740487

Arben Kita (Contact Author)

University of Southampton ( email )

Highfield Campus
Building 2
Southampton, Hampshire SO17 1BJ
United Kingdom

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