Decomposing swap spreads

Feldhütter, Peter; Lando, David

doi:10.1016/j.jfineco.2007.07.004

Cited by 203 publications

(44 citation statements)

References 41 publications

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“…This does not cause an additional computational burden since the above formulation preserves affinity. Estimates of c and e are very close to zero and exhibit high variability (similarly to the results in Feldhütter and Lando (2008) for the short rate), which indicates only weak evidence for dependence.…”

Section: Model Specificationsupporting

confidence: 59%

“…For maturities shorter than one year we use money-market (Libor) rates for 1, 3, 6 and 9 months. Feldhütter and Lando (2008) find that swap rates are the best parsimonious proxy for riskless rates. The estimation is performed on ten years of daily zero-yields bootstrapped from USD swap rates between June 1, 1998 and May 30, 2008.…”

Section: Estimation Methodologymentioning

confidence: 85%

“…5). Feldhütter and Lando (2008) provide a discussion of evidence from recent literature. We therefore abstain from modeling dependence between 4 Model parameters under both measures satisfy constraints analogous to (4).…”

Section: Model Specificationmentioning

confidence: 99%

See 2 more Smart Citations

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

Schneider¹,

Sögner²,

Veža³

2010

J. Financ. Quant. Anal.

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A previous version of this paper was circulated as "Jumps and Recovery Rates Inferred from Corporate CDS Premia". We are thankful to FIRM@WU for access to their high-performance computing resources as well as friendly support, and to Dow Jones for providing us with complete ICB sector information. AbstractUsing an extensive cross-section of US corporate CDS this paper offers an economic understanding of implied loss given default (LGD) and jumps in default risk. We formulate and underpin empirical stylized facts about CDS spreads, which are then reproduced in our affine intensity-based jump-diffusion model. Implied LGD is well identified, with obligors possessing substantial tangible assets expected to recover more. Sudden increases in the default risk of investment-grade obligors are higher relative to speculative grade. The probability of structural migration to default is low for investment-grade and heavily regulated obligors because investors fear distress rather through rare but devastating events.

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Section: Model Specificationsupporting

confidence: 59%

Section: Estimation Methodologymentioning

confidence: 85%

See 1 more Smart Citation

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

Schneider¹,

Sögner²,

Veža³

2010

J. Financ. Quant. Anal.

View full text Add to dashboard Cite

show abstract

“…For example, the AAA 5-year non-default component is estimated to be 53 basis points. Similar evidence of a large non-default component at both short and long maturities is found in Longstaff (2004) andFeldhütter andLando (2008). Despite the evidence for a non-default component in credit spreads few papers have tried to explain the credit spread puzzle as arising from the difference in liquidity between corporate bonds and Treasury bonds.…”

Section: Literature Reviewmentioning

confidence: 65%

The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures

Feldhütter¹

2011

Rev. Financ. Stud.

Self Cite

352

113

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I model how corporate bond prices are affected by search frictions and occasional selling pressures and test my predictions empirically. A key prediction is that in a distressed market with more sellers than buyers, prices paid by institutional investors decrease more than those of retail investors. Using a structural estimation, the model is able to identify liquidity crises (i.e. high number of forced sellers) based on the relative prices of institutional and retail investors. New light is shed on two crises, the downgrade of GM and Ford in 2005 and the current crisis. The model also explains why the spread between corporate bond yields and Treasury yields is so large, the so-called credit spread puzzle. * I am very grateful to David Lando and Lasse Heje Pedersen for many helpful comments and discussions and to Jens Dick-Nielsen for discussions regarding the TRACE database. I also thank Viral

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“…Nevertheless, because they are over-the-counter contracts, they are less subject to the liquidity squeezes that the U.S. Treasuries have experienced (Liu et al 2006). Feldhütter and Lando (2005) show that the "true" risk-free rate is somewhere between the Treasury rate and the swap rate. We choose the Treasury rate mainly because of data availability.…”

Section: Term Structure Of Corporate Yields Andmentioning

confidence: 99%

A No-Arbitrage Analysis of Macroeconomic Determinants of the Credit Spread Term Structure

Zhang

2008

Management Science

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F rom a large array of economic and financial data series, this paper identifies three fundamental risk dimensions underlying an economy: inflation, real output growth, and financial market volatility. Furthermore, through a no-arbitrage model, the paper links the dynamics and market pricing of the three risk dimensions to the term structure of U.S. Treasury yields and corporate bond credit spreads. Model estimation shows that positive inflation shocks increase Treasury yields and widen credit spreads on corporate bonds across all maturities and credit-rating classes. Positive real output growth shocks also increase Treasury yields, but they suppress the credit spreads at low credit-rating classes, thus generating negative correlations between interest rates and credit spreads. The financial market volatility factor has a small and transient effect on the Treasury yield curve, but it exerts a strongly positive and persistent effect on the credit spread term structure. The paper provides a robust and internally consistent method for extracting systematic economic information from a large array of noisy observations and establishing how different risk dimensions of the fundamental economy interact with interest rate and credit risk.

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Decomposing swap spreads

Cited by 203 publications

References 41 publications

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

The Economic Role of Jumps and Recovery Rates in the Market for Corporate Default Risk

The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures

A No-Arbitrage Analysis of Macroeconomic Determinants of the Credit Spread Term Structure

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