Working Paper: NBER ID: w15848
Authors: Kay Giesecke; Francis A. Longstaff; Stephen Schaefer; Ilya Strebulaev
Abstract: We study corporate bond default rates using an extensive new data set spanning the 1866-2008 period. We find that the corporate bond market has repeatedly suffered clustered default events much worse than those experienced during the Great Depression. For example, during the railroad crisis of 1873-1875, total defaults amounted to 36 percent of the par value of the entire corporate bond market. We examine whether corporate default rates are best forecast by structural, reduced-form, or macroeconomic credit models and find that variables suggested by structural models outperform the others. Default events are only weakly correlated with business downturns. We find that over the long term, credit spreads are roughly twice as large as default losses, resulting in an average credit risk premium of about 80 basis points. We also find that credit spreads do not adjust in response to realized default rates.
Keywords: Corporate Bonds; Default Risk; Financial Crisis
JEL Codes: G12; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| historical context of corporate finance (G39) | corporate bond default rates (G33) |
| credit risk premium (G12) | credit spreads (G12) |
| structural models (E10) | corporate bond default rates (G33) |
| credit spreads (G12) | corporate bond default rates (G33) |
| NBER recession indicators (E32) | corporate bond default rates (G33) |