Time-Varying Asset Volatility and the Credit Spread Puzzle

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

12 Scopus Citations
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Author(s)

  • Du DU
  • Redouane Elkamhi
  • Jan Ericsson

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)1841-1885
Journal / PublicationJournal of Finance
Volume74
Issue number4
Online published27 Feb 2019
Publication statusPublished - Aug 2019

Abstract

Most extant structural credit risk models underestimate credit spreads—a shortcoming known as the credit spread puzzle. We consider a model with priced stochastic asset risk that is able to fit medium- to long-term spreads. The model, augmented by jumps to help explain short-term spreads, is estimated on firm-level data and identifies significant asset variance risk premia. An important feature of the model is the significant time variation in risk premia induced by the uncertainty about asset risk. Various extensions are considered, among them optimal leverage and endogenous default.

Bibliographic Note

Full text of this publication does not contain sufficient affiliation information. With consent from the author(s) concerned, the Research Unit(s) information for this record is based on the existing academic department affiliation of the author(s).

Citation Format(s)

Time-Varying Asset Volatility and the Credit Spread Puzzle. / DU, Du; Elkamhi, Redouane; Ericsson, Jan.

In: Journal of Finance, Vol. 74, No. 4, 08.2019, p. 1841-1885.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review