Speaker: Dr. Shi Zhan (PBC School of Finance, Tsinghua University)
The Global Credit Spread Puzzle
10:00-11:15 am, 2019/10/18 (Friday)
Room W202, Administration Building
Dr. Shi Zhan (PBC School of Finance, Tsinghua University)
Using security-level credit spread data in eight developed economies, we document a large cross-country diﬀerence in credit spreads conditional on credit ratings and other default risk measures. Regardless of the calibration methods used, the structural model of Black and Cox (1976) does not explain this cross-country variation in credit spreads. Since this cross-country variation is positively related to illiquidity measures, we calibrate an extended structural model that incorporates endogenous liquidity in the secondary market, and ﬁnd that this model largely explains credit spreads in cross sections and over time. Therefore, default risk itself unlikely explains corporate credit spreads.