Time‐Varying Asset Volatility and the Credit Spread Puzzle

Du Du, Redouane Elkamhi and Jan Ericsson

Journal of Finance, 2019, vol. 74, issue 4, 1841-1885

Abstract: Most extant structural credit risk models underestimate credit spreads—a shortcoming known as the credit spread puzzle. We consider a model with priced stochastic asset risk that is able to fit medium‐ to long‐term spreads. The model, augmented by jumps to help explain short‐term spreads, is estimated on firm‐level data and identifies significant asset variance risk premia. An important feature of the model is the significant time variation in risk premia induced by the uncertainty about asset risk. Various extensions are considered, among them optimal leverage and endogenous default.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://doi.org/10.1111/jofi.12765

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:74:y:2019:i:4:p:1841-1885

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().