The myth of the credit spread puzzle

Feldhütter, P and Schaefer, S M (2018) The myth of the credit spread puzzle. The Review of Financial Studies, 31 (8). pp. 2897-2942. ISSN 0893-9454 (In Press) OPEN ACCESS


We ask whether a standard structural model (Black and Cox, 1976) is able to explain credit spreads on corporate bonds and, in contrast to much of the literature, we find that the model matches the level of investment grade spreads well. Model spreads for speculative grade debt are too low and we find that bond illiquidity contributes to this underpricing. Our analysis makes use of a new approach for calibrating the model to historical default rates that leads to much more precise estimates of investment grade default probabilities.

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Item Type: Article
Subject Areas: Finance
Additional Information: © 2018 Society for Financial Studies. This is a pre-copyedited, author-produced version of an article accepted for publication in The Review of Financial Studies following peer review. The version of record: Peter Feldhütter, Stephen Schaefer: The Myth of the Credit Spread Puzzle, The Review of Financial Studies, 31 (8). pp. 2897-2942, is available online at:
Funder Name: Danish National Research Foundation
Subjects: C > Credit management
C > Corporate bonds
Date Deposited: 05 Feb 2018 10:08
Last Modified: 15 Sep 2019 17:19

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