Author : David S. Sun
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (137 download)
Book Synopsis Long Run Credit Risk Diversification by : David S. Sun
Download or read book Long Run Credit Risk Diversification written by David S. Sun and published by . This book was released on 2010 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following the reduced-form models of Duffee (1999) and Jarrow, Lando and Yu (2005), this study investigates the risk diversification issue of corporate bond portfolios. Considering especially long run market behavior, our empirical decomposition of corporate bond yield spreads indicates that the idiosyncratic component serves as a good vehicle for risk diversification. Moreover, the idiosyncratic spread provides significant inferences about observed conditional corporate bond default rate, while full spread does not. Applying an affine model from Duffie and Singleton (1999), we find that the idiosyncratic credit spreads do not respond empirically to Treasury yields, unlike what is suggested in the structural model of Longstaff and Schwartz (1995) and literatures that follow. Systematic credit spreads are however positively related to Treasury yields in the long-run, but negatively so in the short run, suggesting the validity of both the tax and the option hypotheses. A long-run and optimal decomposition scheme yields an idiosyncratic credit spread measure at a median of 60 b.p.