Institute of Finance
Date: / -
Speaker: Yoshio Nozawa, HKUST - Hong Kong University of Science and Technolog
Title: "The Global Credit Spread Puzzle"
Date: February 12, 2019
Time: 12:25 - 13:40
Room: Blue Room (Executive Center)
Using security-level credit spread data in Japan, the UK, Germany, France, Italy and Canada, we find robust evidence that structural models of risky debt underpredict bond yield spreads and single-name credit default swap spreads, in particular for investment-grade names. The country-level pricing errors are large, comove with the errors in the US, have a strong factor structure, and are associated with liquidity proxies and option-based uncertainty measures. The first principal component of the pricing errors negatively predicts economic growth in these six countries, underscoring the economic significance of the information missed by the model.