Brown bag seminar with Peter Feldhütter, London Business School
The Department of Finance and FRIC are happy to announce the upcoming Brown Bag Seminar with Peter Feldhütter, London Business School
Peter Feldhütter will present:
The Credit Spread Puzzle - Myth or Reality?
Peter Feldhütter, London Business School
Stephen Schaefer, London Business School
A number of papers find that standard structural models predict spreads that are too low compared to actual spreads, giving rise to the so-called credit spread puzzle. In this paper we examine the existing literature documenting the credit spread puzzle and find that common approaches to testing structural models suffer from strong biases and low statistical power. We then test the Merton model in a bias-free approach using more than half a million transactions in the period 2002-2012. We find almost no evidence of the credit spread puzzle and in particular we find that the Merton model captures both the average level and time series variation of 10-year BBB-AAA spreads.
Solbjerg Plads 3, 2000 Frederiksberg