Time Varying Default Risk Premia in Corporate Bond Markets
49 Pages Posted: 20 Mar 2007 Last revised: 14 Nov 2022
Date Written: June 22, 2007
We develop a methodology to study the linkages between equity and corporate bond risk premia and apply it to a large panel of corporate bond transaction data. We and that a significant part of the time variation in bond default risk premia can be explained by equity implied bond risk premium estimates. We compute these estimates using a recent structural credit risk model. In addition, we show by means of linear regressions that augmenting the set of variables predicted by typical structural models with equity-implied bond default risk premia significantly increases explanatory power. This in turn suggests that time varying risk premia are a desirable feature for future structural models.
Keywords: corporate bonds, credit risk, structural model, volatility, default risk premia, idiosyncratic risk
JEL Classification: G12, G13
Suggested Citation: Suggested Citation