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Downside risk and the size of credit spreads
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Gemmill, Gordon and Keswani, Aneel (2011) Downside risk and the size of credit spreads. Journal of Banking & Finance, Vol.35 (No.8). pp. 2021-2036. doi:10.1016/j.jbankfin.2011.01.019 ISSN 0378-4266.
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Official URL: http://dx.doi.org/10.1016/j.jbankfin.2011.01.019
Abstract
We investigate why spreads on corporate bonds are so much larger than expected losses from default. Systematic factors make very little contribution to spreads, even if higher moments or downside effects are taken into account. Instead we find that sizes of spreads are strongly related to idiosyncratic-risk factors: not only to idiosyncratic equity volatility, but even more to idiosyncratic bond volatility and idiosyncratic bond value-at-risk. Idiosyncratic bond volatility helps to explain spreads because it reflects not just the distribution of firm value but is also a proxy for liquidity risk. Idiosyncratic bond value-at-risk adds to this by capturing the left-skewness of the firm-value distribution. We confirm our results both for the initial 1997–2004 sample period and also out of sample for 2005–2009, which includes the sub-prime crisis. Overall, credit spreads are large because they incorporate a large risk premium related to investors’ fears of extreme losses.
| Item Type: | Journal Article | ||||
|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HG Finance | ||||
| Divisions: | Faculty of Social Sciences > Warwick Business School | ||||
| Library of Congress Subject Headings (LCSH): | Corporate bonds, Risk | ||||
| Journal or Publication Title: | Journal of Banking & Finance | ||||
| Publisher: | Elsevier Science BV | ||||
| ISSN: | 0378-4266 | ||||
| Official Date: | August 2011 | ||||
| Dates: |
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| Volume: | Vol.35 | ||||
| Number: | No.8 | ||||
| Page Range: | pp. 2021-2036 | ||||
| DOI: | 10.1016/j.jbankfin.2011.01.019 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Restricted or Subscription Access | ||||
| Date of first compliant deposit: | 18 December 2015 | ||||
| Date of first compliant Open Access: | 18 December 2015 |
Data sourced from Thomson Reuters' Web of Knowledge
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