This paper is a study of the properties and uses of option based estimates of risk neutral default probabilities (RNDP). We argue that because RNDP are the pricing probabilities, their changes should possess the information embedded in price changes. In this paper we provide the first evidence...

Default probabilities are important to the credit markets. Changes in default probabilities may forecast credit rating migrations to other rating levels or to default. Such rating changes can affect the firm’s cost of capital, credit spreads, bond returns, and the prices and hedge ratios...

This paper analyzes the components of corporate credit spreads. The analysis is based on a structural model that can offer a framework to understand the decomposition. The paper contends that default risk may correctly represent only a small portion of corporate credit spreads. This idea stems...