Long-Term Expected Credit Spreads and Excess Returns
13 October 2016
We determine long-term expected credit spreads and excess returns for multiple US corporate bond ratings and maturities. The long-term expected credit spreads and excess returns are determined using an extension of the risk-neutral valuation model of Fons (1994) by incorporating the well-known "credit spread puzzle".
The model is calibrated on long historical data over the 1919 to 2014 period, a sample period that is much longer than used in most other papers analysing expected credit spreads and excess returns. Our model-implied expected credit spread term structures capture both the theoretical (Dufﬁe and Singleton (1999)) and empirical (He, Hu, and Lang (2000)) stylized facts for the shapes of the credit spread term structures. Furthermore, we extend the ﬁndings of the long-term expected credit spreads and excess returns of Giesecke et al. (2011) by determining the credit spreads and excess returns for multiple ratings and maturities. Finally, our model can straightforwardly be applied to determine the long-term expected credit spreads and excess returns for other regions than the US.
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