Time Varying Default Risk Premia in Corporate Bond Markets

49 Pages Posted: 20 Mar 2007 Last revised: 13 May 2009

See all articles by Jan Ericsson

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Redouane Elkamhi

University of Toronto - Rotman School of Management

Date Written: June 22, 2007

Abstract

We develop a methodology to study the linkages between equity and corporate bond risk premia and apply it to a large panel of corporate bond transaction data. We and that a significant part of the time variation in bond default risk premia can be explained by equity implied bond risk premium estimates. We compute these estimates using a recent structural credit risk model. In addition, we show by means of linear regressions that augmenting the set of variables predicted by typical structural models with equity-implied bond default risk premia significantly increases explanatory power. This in turn suggests that time varying risk premia are a desirable feature for future structural models.

Keywords: corporate bonds, credit risk, structural model, volatility, default risk premia, idiosyncratic risk

JEL Classification: G12, G13

Suggested Citation

Ericsson, Jan and Elkamhi, Redouane, Time Varying Default Risk Premia in Corporate Bond Markets (June 22, 2007). Paris December 2007 Finance International Meeting AFFI-EUROFIDAI Paper, Available at SSRN: https://ssrn.com/abstract=972636 or http://dx.doi.org/10.2139/ssrn.972636

Jan Ericsson (Contact Author)

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
(514) 398-3186 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://people.mcgill.ca/jan.ericsson/

Swedish Institute for Financial Research (SIFR)

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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