To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage o...

This paper addresses two puzzles about corporate debt: the “credit spread puzzle” – why yield spreads between corporate bonds and treasuries are high and volatile – and the “under-leverage puzzle” – why firms use debt conservatively despite seemingly large tax benefits and low costs of financial distress. I propose a unified explanation for both puzzles: investors demand high risk premia for ho...

We consider the problem of computing some basic quantities such as defaultable bond prices and survival probabilities in a credit risk model according to the intensity based approach. We let the default intensities depend on an external factor process that we assume is not observable. We use stochastic filtering to successively update its distribution on the basis of the observed default histor...

We propose a structural model for the valuation of defaultable securities of a firm which models the effect of deliberate misreporting done by insiders in the firm and unobserved by others. We derive exact formulas for equity and bond prices and approximate expressions for the conditional default probability, recovery rate, and credit spread under the proposed credit risk framework. We propose ...

We develop a model for pricing risky debt and valuing credit derivatives that is easily calibrated to existing variables. Our approach is based on expanding the Heath-Jarrow-Morton (1990) term-structure model and its extension, the Das-Sundaram (2000) model to allow for defaultable debt with rating transitions. The framework has two salient features, comprising extensions over the earlier work:...

This paper provides a general framework for doubly stochastic term structure models for portfolio of credits, such as collateralized debt obligations (CDOs). We introduce the defaultable (T, x)-bonds, which pay one if the aggregated loss process in the underlying pool of the CDO has not exceeded x at maturity T , and zero else. Necessary and sufficient conditions on the stochastic term structur...

Although the Basle Committee has identified recovery risk as an important source of risk in addition to default, the impact of recovery rates on bond prices is not yet fully understood in the literature. This paper proposes a reduced form discrete-time approach for pricing defaultable securities incorporating stochastic recovery rates. We provide pricing formulas for risky bonds and CDS contrac...

We study an equilibrium model for the pricing of a defaultable zero coupon bond issued by a firm in the framework of Back [2]. The market consists of a risk-neutral informed agent, noise traders and a market maker who sets the price using the total order. When the insider does not trade, the default time possesses a default intensity in market’s view as in reduced-form credit risk models. Howev...

This paper studies the problem of default correlation. We first introduce a random variable called “timeuntil-default” to denote the survival time of each defaultable entity or financial instrument, and define the default correlation between two credit risks as the correlation coefficient between their survival times. Then we argue why a copula function approach should be used to specify the jo...

In this paper, using China’s risk-free and corporate zero yields together with aggregate credit risk measures and various control variables from 2006 to 2013, we document a puzzle of counter-credit-risk corporate yield spreads. We interpret this puzzle as a symptom of the immaturity of China’s credit bond market, which reveals a distorted pricing mechanism latent in the fundamental of this mark...