US Corporate Bond Yield Spread: A default risk debate

Mercredi | 2011-11-23

Syed Muhammad Noaman Ahmed SHAH

According to theoretical models of valuing risky corporate securities, risk of default is primary component in the overall yield spread. However, sizable empirical literature considers it otherwise by giving more importance to non-default risk factors. Current study empirically attempts to provide answer to this question by presuming that problem lies in the empirical measurement technique. By using post-hoc estimator approach of Lubotsky & Wittenberg 2006, we construct an efficient indicator for risk of default, by using sample of 252 non-financial US corporate data. On average, our results manifest significantly that potential problem lies in the ad-hoc measurement methods used in existing empirical literature.