Journal ArticleDOI
Do Credit Spreads Reflect Stationary Leverage Ratios
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TLDR
This paper proposed a structural model of default with stochastic interest rates that captures the mean reversion of leverage ratios, which is more consistent with empirical findings than predictions of extant models.Abstract:
Most structural models of default preclude the firm from altering its capital structure. In practice, firms adjust outstanding debt levels in response to changes in firm value, thus generating mean-reverting leverage ratios. We propose a structural model of default with stochastic interest rates that captures this mean reversion. Our model generates credit spreads that are larger for low-leverage firms, and less sensitive to changes in firm value, both of which are more consistent with empirical findings than predictions of extant models. Further, the term structure of credit spreads can be upward sloping for speculative-grade debt, consistent with recent empirical findings.read more
Citations
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The Determinants of Credit Spread Changes
TL;DR: In this article, the determinants of credit spread changes were investigated using dealer's quotes and transactions prices on straight industrial bonds, and the residuals from this regression are highly cross-correlated, and principal components analysis implies they are mostly driven by a single common factor.
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Equity Volatility and Corporate Bond Yields
TL;DR: This paper explored the effect of equity volatility on corporate bond yields and found that idiosyncratic firm-level volatility can explain as much cross-sectional variation in yields as can credit ratings, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu.
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Equity Volatility and Corporate Bond Yields
John Y. Campbell,Glen B. Taksler +1 more
TL;DR: In this paper, the authors explore the effect of stock market volatility on corporate bond yields and find that stock prices will increase much more than bond prices, since stockholders receive all residual profits, while bondholders receive no more than the promised payments of principal and interest.
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How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk?
Jing-Zhi Huang,Ming Huang +1 more
TL;DR: The authors showed that credit risk accounts for only a small fraction of yield spreads for investment-grade bonds of all maturities, with the fraction lower for bonds of shorter maturity.
Journal ArticleDOI
Multi-period corporate default prediction with stochastic covariates☆
TL;DR: In this paper, the authors provide maximum likelihood estimators of term structures of conditional probabilities of bankruptcy over relatively long time horizons, incorporating the dynamics of firm-specific and macroeconomic covariates.
References
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Journal ArticleDOI
On the pricing of corporate debt: the risk structure of interest rates
TL;DR: In this article, the American Finance Association Meeting, New York, December 1973, presented an abstract of a paper entitled "The Future of Finance: A Review of the State of the Art".
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An equilibrium characterization of the term structure
TL;DR: In this article, the authors derived a general form of the term structure of interest rates and showed that the expected rate of return on any bond in excess of the spot rate is proportional to its standard deviation.
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Corporate Debt Value, Bond Covenants, and Optimal Capital Structure
TL;DR: In this article, the authors examined corporate debt values and capital structure in a unified analytical framework and derived closed-form results for the value of long-term risky debt and yield spreads, and for optimal capital structure.
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Valuing corporate securities: some effects of bond indenture provisions
Fischer Black,John C. Cox +1 more
TL;DR: In this paper, the effects of safety covenants, subordination arrangements, and restrictions on the financing of inter-bank transactions are analyzed for option pricing in the context of security indentures.
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Modeling Term Structures of Defaultable Bonds
TL;DR: In this paper, a reduced-form model of the valuation of contingent claims subject to default risk is presented, focusing on applications to the term structure of interest rates for corporate or sovereign bonds and the parameterization of losses at default in terms of the fractional reduction in market value that occurs at default.