The GM and Ford downgrade to junk status during May 2005 caused a wide-spread sell-off in their corporate bonds. Using a novel dataset, we document that this sell-off appears to have generated significant liquidity risk for market-makers, as evidenced in the significant imbalance in their quotes...

It is well known that structural models of credit risk provide poor predictions of bond prices. We show that they may perform much better as a predictor of debt return sensitivities to equity. This is important since it gives us an opportunity to identify much better the reasons for model...