Corporate Credit Risk Changes: Common Factors and Firm-Level Fundamentals

27 Pages Posted: 17 Mar 2004

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Gergana Jostova

George Washington University - Department of Finance

Alexander Philipov

George Mason University - Department of Finance

Date Written: October 27, 2006

Abstract

This paper provides new evidence on the empirical success of structural models in explaining corporate credit risk changes. A parsimonious set of common factors and firm-level fundamentals, inspired by structural models, explains more than 54% (67%) of the variation in credit spread changes for medium (low) grade bonds. No dominant latent factor is present in the unexplained variation. While our set of variables has lower explanatory power among high-grade bonds, it does capture most of the systematic variation of credit spread changes in that category as well. It also subsumes the explanatory power of the Fama and French (1993) factors among all grade classes.

Keywords: Credit spread changes, corporate bonds, structural models of default, default risk

JEL Classification: G10, G11, G12, G14, G15

Suggested Citation

Avramov, Doron and Jostova, Gergana and Philipov, Alexander, Corporate Credit Risk Changes: Common Factors and Firm-Level Fundamentals (October 27, 2006). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=517767 or http://dx.doi.org/10.2139/ssrn.517767

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Gergana Jostova (Contact Author)

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://home.gwu.edu/~jostova

Alexander Philipov

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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