Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/73690
Authors: 
Shah, Syed Noaman
Kebewar, Mazen
Year of Publication: 
8-Mar-2013
Abstract: 
According to theoretical models of valuing risky corporate securities, risk of default is primary component in overall yield spread. However, sizable empirical literature considers it otherwise by giving more importance to non-default risk factors. Current study empirically attempts to provide relative solution to this conundrum by presuming that problem lies in the subjective empirical treatment of default risk. By using post-hoc estimator approach of Lubotsky & Wittenberg (2006), we construct an efficient indicator for risk of default, by using sample of 252 US non-financial corporate data (2000-2010). On average, our results validate that almost 48% of change in yield spread is explained by default risk especially in recent financial crisis period (2007-2009). Hence, our results relatively suggest that potential problem lies in the ad-hoc measurement methods used in existing empirical literature.
Subjects: 
Default risk
Credit spread
Risk-aversion
Measurement error
Index construction
JEL: 
C1
C30
G12
G14
Document Type: 
Preprint

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