Peter Feldhütter's Stochastic Debt Dynamics Published in Journal of Financial Economics

Journal of Financial Economics showcases Feldhütter and Schaefer's pioneering study on debt dynamics and credit risk.


The Center for Big Data in Finance is thrilled to announce the recent publication of a groundbreaking paper by Peter Feldhütter in the prestigious Journal of Financial Economics. Titled "Debt Dynamics and Credit Risk," and co-authored with Stephen Schaefer, the research explores the intricate relationship between corporate debt policy and the pricing of corporate bonds.

In the paper, Feldhütter and Schaefer empirically demonstrate that firms with low equity returns take on more debt in the short run and less debt in the long run compared to firms with high equity returns and integrate this novel insight into structural models of credit risk. They incorporate these debt dynamics into both standard diffusion models and advanced models with stochastic volatility and jumps, leading to more accurate predictions of credit spreads, particularly for short-maturity investment grade bonds.  Their research contributes to a comprehensive understanding of corporate capital structure dynamics, challenging the conventional assumption of constant debt in structural models of credit risk.

Their paper addresses a critical gap in existing literature by emphasizing the dynamic nature of a firm's capital structure, shedding light on its impact on credit risk pricing. The study also explores the trade-off theory and pecking order theory, providing valuable insights into their relative importance in structural models of credit risk. Their research not only enriches academic discourse but also has practical implications for financial professionals navigating the complex landscape of credit markets.

Listen to Peter Feldhütter talk about their paper here.

Find the paper here.

Sidst opdateret: Department of Finance // 14/03/2024