The Myth of the Credit Spread Puzzle

Feldhütter, P and Schaefer, S M (2018) The Myth of the Credit Spread Puzzle. Review of Financial Studies, 31 (8). pp. 2897-2942. ISSN 0893-9454 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
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© 2018 Society for Financial Studies

Funder Name: Danish National Research Foundation
Date Deposited: 05 Feb 2018 10:08
Date of first compliant deposit: 02 Feb 2018
Subjects: Credit management
Corporate bonds
Last Modified: 26 May 2024 01:18

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