Option-Based Credit Spreads
Christopher L. Culp,
Yoshio Nozawa and
American Economic Review, 2018, vol. 108, issue 2, 454-88
We present a novel empirical benchmark for analyzing credit risk using "pseudo firms" that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo firm assets. Empirically, like corporate spreads, pseudo bond spreads are large, countercyclical, and predict lower economic growth. Using this framework, we find that bond market illiquidity, investors' overestimation of default risks, and corporate frictions do not seem to explain excessive observed credit spreads but, instead, a risk premium for tail and idiosyncratic asset risks is the primary determinant of corporate spreads.
JEL-codes: E23 E32 E44 G13 G24 G32 (search for similar items in EconPapers)
Note: DOI: 10.1257/aer.20151606
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
https://www.aeaweb.org/articles/attachments?retrie ... gmyqfOqiIPiPi0YlzORa (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... mgmdL8ugul6hlvMRvaTv (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:108:y:2018:i:2:p:454-88
Ordering information: This journal article can be ordered from
Access Statistics for this article
American Economic Review is currently edited by Pinelopi Koujianou Goldberg
More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Series data maintained by Jane Voros ().