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Default Risk in Corporate Yield Spreads
Author(s) -
Dionne Georges,
Gauthier Geneviève,
Hammami Khemais,
Maurice Mathieu,
Simonato JeanGuy
Publication year - 2010
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2010.01089.x
Subject(s) - default risk , yield (engineering) , credit risk , economics , econometrics , default , loss given default , ex ante , probability of default , credit spread (options) , financial economics , actuarial science , business , finance , microeconomics , capital requirement , materials science , metallurgy , macroeconomics , incentive
An important research question examined in the credit risk literature focuses on the proportion of corporate yield spreads attributed to default risk. This topic is reexamined in light of the different issues associated with the computation of default probabilities obtained from historical default data. We find that the estimated default risk proportion in corporate yield spreads is sensitive to the ex ante estimated term structure of default probabilities used as inputs. This proportion can become a large fraction of the spread when sensitivity analyses are made with respect to the period over which the probabilities are estimated and the recovery rates.