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Home | Events Archive | Debt Dynamics and Credit Risk
Seminar

Debt Dynamics and Credit Risk


  • Location
    Online
  • Date and time

    May 26, 2021
    12:00 - 13:00

If you are interested in participating in this particular seminar or want to receive information about this series seminar, please email us.

Abstract
We investigate how the dynamics of corporate debt policy affect the pricing of corporate bonds. We find empirically that debt issuance has a significant stochastic component that is imperfectly correlated with shocks to asset value. As a consequence, the volatility of leverage is significantly higher than the volatility of asset over short horizons. At long horizons, the relation between leverage and asset volatility is reversed due to mean reversion in leverage. We incorporate these debt dynamics into an otherwise standard structural model and compare the model's ability to match the cross-section of US credit spreads with that of existing models. The model provides more accurate predictions of credit spreads in both the cross-section and the time series, particularly for short-maturity debt. Joint with Stephen M. Schaefer.

Keywords:Structural Models, Debt Levels, Default Rates, Default Boundary,Credit Risk;

JEL:C23; G12