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SCHOLARLY PUBLICATION ✓ Open Access

How Much of the Corporate-Treasury Yield Spread Is Due to Credit Risk?

Jing-Zhi Jay Huang, Ming Huang

📖 The Review of Asset Pricing Studies 📅 2012-11-15 🔗 DOI: 10.1093/rapstu/ras011

📄 Abstract

We show that credit risk accounts for only a small fraction of yield spreads for investment-grade bonds of all maturities, with the fraction lower for bonds of shorter maturities, and that it accounts for a much higher fraction of yield spreads for high-yield bonds. This conclusion is shown to be robust across a wide class of structural models. We obtain such results by calibrating each of the models to be consistent with data on the historical default loss experience and equity risk premia, and demonstrating that different models predict similar credit risk premia under empirically reasonable parameter choices. (JEL G13, G12, G33, G24)

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