Recent research has shown that default risk accounts for only a part of the total yield spread on risky corporate bonds relative to their riskless benchmarks. One candidate for the unexplained portion of the spread is a premium for the illiquidity in the corporate bond market. We investigate this issue by relating the liquidity of corporate bonds, as measured by their ease of market access, to ...

We develop a structural bond valuation model to simultaneously capture liquidity and credit risk. Our model implies that renegotiation in financial distress is influenced by the illiquidity of the market for distressed debt. As default becomes more likely, the components of bond yield spreads attributable to illiquidity increase. When we consider finite maturity debt, we find decreasing and con...

Any rational pricing phenomenon in the cross section of equity returns must also show up in the corresponding corporate bond returns. We use this powerful insight to investigate whether the equity and corporate bond markets are integrated with respect to risk premia associated with anomalies. We find that the two markets are not integrated through factors suggested by structural credit risk mod...

While much attention has been focused on the optimal ratio of a firm’s debt to equity, the “optimal” or best balance between bond financing and (longer-term) bank financing has scarcely been addressed. This essay examines the principal differences between an economy with a well-developed corporate bond market free from government interference and an economy in which bank financing plays a centr...

We study how the COVID-19 pandemic reshaped relation between corporate and sovereign credit risk in cross-section of countries European Union. Surprisingly, outbreak triggered higher elasticity to CDS spreads core countries, which realigned that peripheral with lower fiscal capacity, for impact on was essentially muted. During pandemic, we observe systematic departures actual from those implied...

Using a suitable change of probability measure, we obtain a novel Poisson series representation for the arbitragefree price process of vulnerable contingent claims in a regime-switching market driven by an underlying continuoustime Markov process. As a result of this representation, along with a short-time asymptotic expansion of the claim’s price process, we develop an efficient method for pri...

This paper analyses the determinants of variation in the yield spread (credit spread) between government bonds and corporate bonds in Japan's bond market after 1997. The authors conduct empirical tests on the relationship between credit spreads and several economic and financial variables. A key finding is that default risk and the overall financial situation in Japan were the most significant ...

The process of liquidity provision in financial markets can result in prolonged exposure to illiquid instruments for market makers. In this case, where a proprietary position is not desired, pro-actively targeting the right client who is likely to be interested can be an effective means to offset this position, rather than relying on commensurate interest arising through natural demand. In this...