Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market

51 Pages Posted: 21 Apr 2004

See all articles by Francis A. Longstaff

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Sanjay Mithal

Deutsche Bank

Eric Neis

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: April 2004

Abstract

We use the information in credit-default swaps to obtain direct measures of the size of the default and nondefault components in corporate spreads. We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the definition of the riskless curve. We also find that the nondefault component is time varying and strongly related to measures of bond-specific illiquidity as well as to macroeconomic measures of bond-market liquidity.

Suggested Citation

Longstaff, Francis A. and Mithal, Sanjay and Neis, Eric, Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market (April 2004). NBER Working Paper No. w10418. Available at SSRN: https://ssrn.com/abstract=528998

Francis A. Longstaff (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sanjay Mithal

Deutsche Bank

31 West 52nd Street, 12th Floor
New York, NY 10019

Eric Neis

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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