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

Longstaff, Francis A.; Mithal, Sanjay; Neis, Eric

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

NBER Working Paper No. w10418

51 Pages Posted: 21 Apr 2004 Last revised: 21 Dec 2022

See all articles by Francis A. Longstaff

Francis A. Longstaff

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

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: 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