Corporate Bond Default Risk: A 150-Year Perspective

Kay Giesecke, Francis Longstaff, Stephen Schaefer and Ilya Strebulaev (istrebulaev@stanford.edu)

No 15848, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study corporate bond default rates using an extensive new data set spanning the 1866-2008 period. We find that the corporate bond market has repeatedly suffered clustered default events much worse than those experienced during the Great Depression. For example, during the railroad crisis of 1873-1875, total defaults amounted to 36 percent of the par value of the entire corporate bond market. We examine whether corporate default rates are best forecast by structural, reduced-form, or macroeconomic credit models and find that variables suggested by structural models outperform the others. Default events are only weakly correlated with business downturns. We find that over the long term, credit spreads are roughly twice as large as default losses, resulting in an average credit risk premium of about 80 basis points. We also find that credit spreads do not adjust in response to realized default rates.

JEL-codes: G12 G33 (search for similar items in EconPapers)
Date: 2010-03
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as Corporate Bond Default Risk: A 150-Year Perspective (with K. Giesecke, I. Strebulaev, and S. Schaefer), Journal of Financial Economics 102, 233-250, 2011.

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