credit spread puzzle

Credit Risk and Disaster Risk

JEL codes: 
E32, E44, G12
Version Date: 
Jan 2011

return on a well-diversified portfolio of corporate bonds is close to zero. In contrast, the empirical finance literature documents large and time-varying risk premia in the corporate bond market (the "credit spread puzzle"). This paper introduces a parsimonious real business cycle model where firms issue defaultable debt and equity to finance investment.

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