Is the credit spread puzzle a myth?

Jennie Bai, Robert S. Goldstein and Fan Yang

Journal of Financial Economics, 2020, vol. 137, issue 2, 297-319

Abstract: We revisit Feldhütter and Schaefer (FS, 2018), who report evidence of a “credit spread puzzle” for high-yield but not investment-grade bonds. We show their results are reversed when their model is calibrated to market values of debt (as required by theory) rather than book values. We then demonstrate that using credit spreads rather than historical default rates to identify the default boundary provides the statistical power necessary to reject their assumption that firm dynamics follow geometric Brownian motion. A large market price of jump risk is required to match historical default rates, which generates a credit spread puzzle for investment-grade but not high-yield bonds.

Keywords: Credit spread puzzle; Structural models; Tail risk (search for similar items in EconPapers)
JEL-codes: C23 G12 G13 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X20300428
Full text for ScienceDirect subscribers only

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:eee:jfinec:v:137:y:2020:i:2:p:297-319

DOI: 10.1016/j.jfineco.2020.02.009

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().