Articlebronze2017

What Drives the Cross‐Section of Credit Spreads?: A Variance Decomposition Approach

80 citations0/0 files storedThe Journal of Finance

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Credit Risk and Financial Regulations Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

ABSTRACT I decompose the variation of credit spreads for corporate bonds into changing expected returns and changing expectation of credit losses. Using a log‐linearized pricing identity and a vector autoregression applied to microlevel data from 1973 to 2011, I find that expected returns contribute to the cross‐sectional variance of credit spreads nearly as much as expected credit loss does. However, most of the time‐series variation in credit spreads for the market portfolio corresponds to risk premiums.

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1977Determinants of corporate borrowing 1974ON THE PRICING OF CORPORATE DEBT: THE RISK STRUCTURE OF INTEREST RATES*2002Illiquidity and stock returns: cross-section and time-series effects 2003Liquidity Risk and Expected Stock Returns 1986Economic Forces and the Stock Market 2006The Cross‐Section of Volatility and Expected Returns 2007A Comprehensive Look at The Empirical Performance of Equity Premium Prediction 1988The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors

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2024Duration-Based Valuation of Corporate Bonds 2021Heterogeneous intermediary asset pricing 2020Monetary Policy and Corporate Bond Returns 2025In Safe Hands: The Financial and Real Impact of Investor Composition over the Credit Cycle 2023A One-Factor Model of Corporate Bond Premia 2020Book-to-Market, Mispricing, and the Cross-Section of Corporate Bond Returns

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