FIN-02-040 |
NYU Stern School of Business |
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
June 2002
Jing-zhi Huang and Ming Huang
ABSTRACT
We show that credit risk accounts for only a small fraction of
the observed corporate-Treasury yield spreads for investment grade
bonds of all maturities, with the fraction smaller for bonds of shorter
maturities; and that it accounds for a much higher fraction of yield
spreads for junk bonds. This conclusion is shown to be robust across
a wide class of structural models-both existing and new ones-that
incorporate many different economic considerations. We obtain such
consistent results by calibrating each of the models to be consistent
with data on historical default loss experience. Different models,
which in theory can still generate a very large range of credit risk premia,
are shown to predict fairly similar credit risk premia under empirically reasonable
parameter choices, resulting in the robustness of our conclusions.
Jing-zhi Huang
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0300
Fax: (212) 995-4233
Email: jhuang0@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~jhuang0
Ming Huang
Institution: Graduate School of Business, Stanford University, Standford, CA 94305
Email: mhuang@stanford.edu
Homepage:http://www.stanford.edu/~mhuang
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