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Default Risk in Corporate Yield Spreads

Georges Dionne, Geneviève Gauthier, Khemais Hammami, Mathieu Maurice and Jean-Guy Simonato ()

Cahiers de recherche from CIRPEE

Abstract: An important research question examined in the recent credit risk literature focuses on the proportion of corporate yield spreads which can be attributed to default risk. Past studies have verified that only a small fraction of the spreads can be explained by default risk. In this paper, we reexamine this topic in the light of the different issues associated with the computation of transition and default probabilities obained with historical rating transition data. One significant finding of our research is that the estimated default-risk proportion of corporate yield spreads in highly sensitive to the term structure of the default probabilities estimated for each rating class. Moreover, this proportion can become a large fraction of the yield spread when sensitivity analyses are made with respect to recovery rates, default cycles in the economy, and information considered in the historical rating transition data.

Keywords: Credit risk; default risk; corporate yield spread; transition matrix; default probability; Moody's; Standard and Poor's; recovery rate; data filtration; default cycle (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 G21 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2005
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Journal Article: Default Risk in Corporate Yield Spreads (2010) Downloads
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