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Corporate Yield Spreads : Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market
Longstaff, Francis A. - 2004
We use the information in credit-default swaps to obtain direct measures of the size of the default and nondefault components in corporate spreads. We find that the majority of the corporate spread is due to default risk. This result holds for all rating categories and is robust to the...
Persistent link: https://www.econbiz.de/10012785748
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Credit Spreads as Predictors of Real-Time Economic Activity : A Bayesian Model-Averaging Approach
Faust, Jon - 2011
Employing a large number of real and financial indicators, we use Bayesian Model Averaging (BMA) to forecast real-time measures of economic activity. Importantly, the predictor set includes option-adjusted credit spread indexes based on bond portfolios sorted by maturity and credit risk as...
Persistent link: https://www.econbiz.de/10013130981
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Credit Risk and Disaster Risk
Gourio, Francois - 2011
Corporate credit spreads are large, volatile, countercyclical, and significantly larger than expected losses, but existing macroeconomic models with financial frictions fail to reproduce these patterns, because they imply small and constant aggregate risk premia. Building on the idea that...
Persistent link: https://www.econbiz.de/10013125570
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Banks and Derivatives
Gorton, Gary B.; Rosen, Richard J. - 2021
interest-rate sensitivities of interest rate swap positions of U.S. commercial banks to empirically address the question of … whether swap contracts have increased or decreased systematic risk in the U.S. banking system. We find that the banking system … as a whole faces little net interest-rate risk from swap portfolios …
Persistent link: https://www.econbiz.de/10013224189
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The Inefficiency of Refinancing : Why Prepayment Penalties are Good for Risky Borrowers
Mayer, Christopher J. - 2010
This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately...
Persistent link: https://www.econbiz.de/10013135393
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Noise as Information for Illiquidity
Hu, Grace Xing - 2010
We propose a broad measure of liquidity for the overall financial market by exploiting its connection with the amount of arbitrage capital in the market and the potential impact on price deviations in US Treasurys. When arbitrage capital is abundant, we expect the arbitrage forces to smooth out...
Persistent link: https://www.econbiz.de/10013137014
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Costly Contracts and Consumer Credit
Livshits, Igor - 2011
Financial innovations are a common explanation of the rise in consumer credit and bankruptcies. To evaluate this story, we develop a simple model that incorporates two key frictions: asymmetric information about borrowers' risk of default and a fixed cost to create each contract offered by...
Persistent link: https://www.econbiz.de/10013120205
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Crashes and Collateralized Lending
Jurek, Jakub W. - 2011
This paper develops a parsimonious static model for characterizing financing terms in collateralized lending markets. We characterize the systematic risk exposures for a variety of securities and develop a simple indifference-pricing framework to value the systematic crash risk exposure of the...
Persistent link: https://www.econbiz.de/10013120294
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A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk
Acharya, Viral V. - 2011
We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy by ameliorating the under-investment problem of the financial sector. However, increasing taxation of the non-financial sector to fund the bailout may be inefficient since it...
Persistent link: https://www.econbiz.de/10013123694
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Credit Spreads and Business Cycle Fluctuations
Gilchrist, Simon - 2011
This paper examines the evidence on the relationship between credit spreads and economic activity. Using an extensive data set of prices of outstanding corporate bonds trading in the secondary market, we construct a credit spread index that is--compared with the standard default-risk...
Persistent link: https://www.econbiz.de/10013125576