Do macroeconomic variables matter for pricing default risk?
Author InfoYan, Alice Xie Shi, Jian Wu, Chunchi Abstract Using a popular three-factor term structure model that accounts for the correlation between default and interest rates to fit corporate bond yields, we uncover missing factors in the model. The principal component analysis indicates that the model residuals of bonds across different ratings and maturities are driven by some common factors. Further analysis shows that residuals exhibit significant negative correlation with the concurrent and lagged monthly returns of S&P 500. Our results suggest that the term structure model of corporate bonds should incorporate aggregate economic factors in order to better explain the term structure of corporate bond yields. Download InfoTo download: If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these fi
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