Working Paper: NBER ID: w10418
Authors: Francis Longstaff; Sanjay Mithal; Eric Neis
Abstract: We use the information in credit-default swaps to obtain direct measures of the size of the default and nondefault components in corporate spreads. We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the definition of the riskless curve. We also find that the nondefault component is time varying and strongly related to measures of bond-specific illiquidity as well as to macroeconomic measures of bond-market liquidity.
Keywords: corporate yield spreads; default risk; liquidity; credit-default swaps
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bond-specific illiquidity measures (G12) | non-default component (Y90) |
| macroeconomic liquidity indicators (E50) | non-default component (Y90) |
| default risk (G33) | corporate yield spreads (G39) |
| corporate yield spreads (G39) | liquidity (E41) |