IRRATIONAL BELIEF AND CREDIT SPREADS PUZZLE
In this paper, we extend the Merton's structured approach to incomplete market economy, in which investors may have irrational or distorted belief about the corporate's future cash flow. Our theoretical model implies irrational belief generates an additional risk. In detail, as distorted belief increases, the corporate values decreases, but the corporate value volatility and negative risk neutral skewness increase.Furthermore since risky corporate bonds are proportional to a short put on the corporate value, credit spreads widen. So irrational belief help to explain the credit spreads puzzle. Finally, we use empirical analysis to test our model results and find that the coefficient of distorted belief in the regressions for credit spreads, in control of many variables, still significant positive.
Year of publication: |
2010
|
---|---|
Authors: | Gao, Yuan ; Gong, Pu ; Bao, Helen |
Institutions: | European Real Estate Society - ERES |
Saved in:
freely available
Extent: | text/html |
---|---|
Series: | ERES. |
Type of publication: | Book / Working Paper |
Source: |
Persistent link: https://www.econbiz.de/10010799574
Saved in favorites
Similar items by person
-
Estimating hedonic housing price models with spline functions
Bao, Helen, (2003)
-
Modelling Price Volatility in the Hong Kong Property Market
Zhou, Sherry, (2007)
-
Semiparametric Estimation of Land Value in an Emerging Market: The Case of Beijing
Bao, Helen, (2007)
- More ...