Risk Aversion and the Yield of Corporate Debt
This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying...
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| Main Authors: | , |
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| Format: | text |
| Language: | English |
| Published: |
Institutional Knowledge at Singapore Management University
1996
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| Subjects: | |
| Online Access: | https://ink.library.smu.edu.sg/lkcsb_research/801 |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying risk premium associated with the investor's risk aversion. The results of nonlinear regressions indicate that previous risk-neutrality models consistently overestimate the implied default rates of corporate bonds. The results also suggest that investors may have been adequately compensated for investment in risky bonds. |
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