New evidence on the credit spread puzzle

Huang and Huang (2012) shows that yields on US investment grade corporate bonds appear to be too high given the low default probabilities of issuing firms. This is called the credit spread puzzle and is particularly severe for bonds with high credit quality and short maturity. In this seminar I re-examine the puzzle and find that for the past ten years 1) yield spreads of highly rated bonds with short maturity are close to zero for most of the sample period, 2) yield spreads of highly rated bonds with long maturity are lower than previously found, and 3) yield spreads between long-maturity BBB-rated and AAA-rated bonds are lower than previously found. These results suggest that for most of the sample period there is not much of a  credit spread puzzle. However, the period of 2008-2009 saw a dramatic widening of spreads due to at least in part illiquidity and raises average spreads over the sample period to levels found in Huang and Huang (2012).

This event is an Erasmus Finance Seminar. The Erasmus Finance Seminar series brings prominent researchers in Finance from all over the world to Rotterdam.