NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Yoshio Nozawa

Lee Shau Kee Business Building
HKUST Business School
Clearwater Bay Road
Hong Kong, China
Sai Kung, NT
Hong Kong

E-Mail: nozawa@ust.hk
Institutional Affiliation: Hong Kong University of Science and Technology

NBER Working Papers and Publications

December 2014Option-Based Credit Spreads
with Christopher L. Culp, Pietro Veronesi: w20776
We present a novel empirical benchmark for analyzing credit risk using “pseudo firms” that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo-firm assets. Empirically, like corporate spreads, pseudo-bond spreads are large, countercyclical, and predict lower economic growth. Using this framework, we find that bond market illiquidity, investors’ over-estimation of default risks, and corporate frictions do not seem to explain excessive observed credit spreads, but, instead, a risk premium for tail and idiosyncratic asset risks is the primary determinant of corporate spreads.

Published: Christopher L. Culp & Yoshio Nozawa & Pietro Veronesi, 2018. "Option-Based Credit Spreads," American Economic Review, vol 108(2), pages 454-488.

 
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