The Levered Equity Risk Premium and Credit Spreads: a Unified Framework

Bhamra, Harjoat Singh; Kuehn, Lars-Alexander; Strebulaev, Ilya A.

doi:10.2139/ssrn.968307

Cited by 75 publications

(145 citation statements)

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“…Jones, Mason, and Rosenfeld (1984) and more recently Huang and Huang (2003) HH03 also show that proposed extensions of the Merton model such as jumps in firm value, stochastic interest rates, endogenously determined default boundary, and meanreverting leverage ratios do not come close to solving the puzzle once they are calibrated with empirically reasonable parameters. More recent papers such as Hackbarth, Miao, and Morellec (2006), Chen, Collin-Dufresne, and Goldstein (2009), Chen (2009), and Bhamra, Kuehn, and Strebulaev (2009 link firm decisions, earnings, risk premia, and/or default rates to the business cycle. They show that realistic credit spreads are generated at longer maturities and for firms with a rating of typically BBB.…”

Section: Literature Reviewmentioning

confidence: 99%

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

Feldhütter¹

2011

Rev. Financ. Stud.

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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Section: Literature Reviewmentioning

confidence: 99%

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

Feldhütter¹

2011

Rev. Financ. Stud.

352

113

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“…[2] and [1] for the equity premium puzzle and the risk-free rate puzzle, [4] for the excess volatility puzzle, and [5] for the credit spread puzzle. All these studies require EIS ψ to be larger than 1 in order to match empirical observations.…”

Section: Introductionmentioning

confidence: 99%

Consumption Investment Optimization with Epstein-Zin Utility in Incomplete Markets

Xing

2015

SSRN Journal

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Abstract. In a market with stochastic investment opportunities, we study an optimal consumption investment problem for an agent with recursive utility of Epstein-Zin type. Focusing on the empirically relevant specification where both risk aversion and elasticity of intertemporal substitution are in excess of one, we characterize optimal consumption and investment strategies via backward stochastic differential equations. The supperdifferential of indirect utility is also obtained, meeting demands from applications in which Epstein-Zin utilities were used to resolve several asset pricing puzzles. The empirically relevant utility specification introduces difficulties to the optimization problem due to the fact that the Epstein-Zin aggregator is neither Lipschitz nor jointly concave in all its variables.

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“…First, it provides both a theory and empirical evidence for the link between systematic risk and firms' maturity choices in the cross section and over time. It adds to the growing body of research on how aggregate risk affects corporate financing decisions, which includes Almeida and Philippon (2007), Acharya, Almeida, and Campello (2012), Bhamra, Kuehn, and Strebulaev (2010a), Bhamra, Kuehn, and Strebulaev (2010b), Chen (2010), Chen and Manso (2010), and Gomes and Schmid (2010), among others.…”

Section: Introductionmentioning

confidence: 99%

Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads

Chen¹,

Yang

2012

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We build a dynamic capital structure model to study the link between firms' systematic risk exposures and their time-varying debt maturity choices, as well as its implications for the term structure of credit spreads. Compared to short-term debt, long-term debt helps reduce rollover risks, but its illiquidity raises the costs of financing. With both default risk and liquidity costs changing over the business cycle, our calibrated model implies that debt maturity is pro-cyclical, firms with high systematic risk favor longer debt maturity, and that these firms will have more stable maturity structures over the cycle. Moreover, pro-cyclical maturity variation can significantly amplify the impact of aggregate shocks on the term structure of credit spreads, especially for firms with high beta, high leverage, or a lumpy maturity structure. We provide empirical evidence for the model predictions on both debt maturity and credit spreads.

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The Levered Equity Risk Premium and Credit Spreads: a Unified Framework

Cited by 75 publications

References 0 publications

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

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

Consumption Investment Optimization with Epstein-Zin Utility in Incomplete Markets

Systematic Risk, Debt Maturity, and the Term Structure of Credit Spreads

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