Can Structural Models Price Default Risk? Evidence from Bond and Credit Derivative Markets

Jan Ericsson, Joel Reneby () and Hao Wang ()
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Jan Ericsson: Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal QC, H3A 1G5, Canada
Hao Wang: School of Economics and Management, Tsinghua University, 318 Weilun Building, Beijing 100084, China

Quarterly Journal of Finance (QJF), 2015, vol. 05, issue 03, 1-32

Abstract: Using a set of structural models, we evaluate the price of default protection for a sample of US corporations. In contrast to previous evidence from corporate bond data, credit default swap (CDS) premia are not systematically underestimated. In fact, one of our studied models has little difficulty on average in predicting their level. For robustness, we perform the same exercise for bond spreads by the same issuers on the same trading date. As expected, bond spreads relative to the treasury curve are systematically underestimated. This is not the case when the swap curve is used as a benchmark, suggesting that previously documented underestimation results may be sensitive to the choice of risk-free rate.

Keywords: Default risk; structural models; credit default swaps; corporate bonds; yield spreads (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S201013921550007X

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