 Credit default swap spreads and variance risk premiaHao Wang, Hao Zhou and Yi Zhou Journal of Banking & Finance, 2013, vol. 37, issue 10, 3733-3746 Abstract: We find that the firm-level variance risk premium has a prominent explanatory power for credit spreads in the presence of market- and firm-level control variables established in the existing literature. Such predictability complements that of the leading state variable—the leverage ratio—and strengthens significantly with a lower firm credit rating, longer credit contract maturity, and model-free implied variance. We provide further evidence that (1) the variance risk premium has a cleaner systematic component than implied variance or expected variance, (2) the cross-section of firms’ variance risk premia capture systematic variance risk in a stronger way than firms’ equity returns in capturing market return risk, and (3) a structural model with stochastic volatility can reproduce the predictability pattern of variance risk premia for credit spreads. Keywords: Variance risk premia; Credit default swap spreads; Option-implied variance; Expected variance; Realized variance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:10:p:3733-3746 DOI: 10.1016/j.jbankfin.2013.02.021 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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