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Title: Default Risk in Corporate Yield Spreads
Authors: Dionne, Georges
Gauthier, Geneviève
Hammami, Khemais
Maurice, Mathieu
Simonato, Jean-Guy
Keywords: Credit risk
Default risk
Corporate yield spread
Transition matrix
Default probability
Moody's
Standard and Poor's
Recovery rate
Data filtration
Default cycle
Issue Date: 2005-11
Series/Report no.: Cahiers du CIRPÉE;05-32
Abstract: An important research question examined in the recent credit risk literature focuses on the proportion of corporate yield spreads which can be attributed to default risk. Past studies have verified that only a small fraction of the spreads can be explained by default risk. In this paper, we reexamine this topic in the light of the different issues associated with the computation of transition and default probabilities obtained with historical rating transition data. One significant finding of our research is that the estimated default-risk proportion of corporate yield spreads is highly sensitive to the term structure of the default probabilities estimated for each rating class. Moreover, this proportion can become a large fraction of the yield spread when sensitivity analyses are made with respect to recovery rates, default cycles in the economy, and information considered in the historical rating transition data.
URI: http://132.203.59.36/CIRPEE/cahierscirpee/2005/files/CIRPEE05-32.pdf
https://depot.erudit.org/id/002061dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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