We study the exposure of the U.S. corporate bond returns to liquidity shocks of stocks and treasury bonds over the period 1973-2007 in a regime switching model. In one regime, liquidity shocks have mostly insignificant effect on bond prices, whereas in another regime, a rise in illiquidity...

This paper examines the unique ability of The Model: a structural credit risk model proposed in Buellesbach (2015), to match the market in ways unmatched by other well-known structural models. The Model demonstrates the capacity to accurately value firms' equity and debt across the entire credit...

This paper provides an overview on classical and new methods for testing time series properties of migration matrices. It is well known that due to cyclical behaviour of the economy transition matrices for many credit portfolios cannot be considered to be constant through time. Further,...

I develop methods that produce consistent estimates of the Vasicek-Basel IRB (VAIRB) credit risk model parameters. I apply these methods to Moody's data on corporate defaults over the period 1920–2008 and assess the model fit and construct hypothesis tests using bootstrap methods. The results...

We formulate a Cournot-type market equilibrium model of simultaneous trading in the CDS and Loan CDS (LCDS) markets. We use novel formulations of two-market demand functions that include trading costs and margins. The equilibrium identifies a relation between premiums, elasticities and recovery...

In this paper, we evaluate an alternative approach for bankruptcy prediction that measures the financial healthiness of firms that have coupon-paying debts. The approach is based on the framework of Leland and Toft (1996), which is an extension of a widely-used model; the Black-Scholes-Merton...

Following the method of Pesaran, Shin and Smith (1999), this study extends the results of Sun, Lin and Nieh (2007) to investigate the risk diversification issue of individual corporate bonds in portfolios. This is one of the few studies on the decomposition of individual corporate yield spreads....

We propose the debt-equity spread (DES), the difference between the actual and equity-implied credit spreads, as a measure of the valuation gap between debt and equity at the firm and bond level. DES strongly predicts stock and bond returns in opposite directions. A strategy that takes a long...

This paper shows that the optimal leverage decreases with asset volatility risk in a trade-off framework. Thus, the paper relates the asset volatility risk premium to the underleverage puzzle. In models without volatility risk, the paper empirically documents that underleverage increases with...

We show that the post earnings announcement drift (PEAD) is stronger for conglomerates thansingle-segment firms. Conglomerates, on average, are larger than single segment firms, so it isunlikely that limits-to-arbitrage drive the difference in PEAD. Rather, we hypothesize that marketparticipants...