Can Equity Volatility Explain the Global Loan Pricing Puzzle?

• Center for Fiscal Policy Working Paper Series, 2011

We examine whether equity volatility can explain the difference in syndicated corporate loan spreads paid by U.S. and European borrowers first documented by Carey and Nini (2007). We argue that OLS estimates of the association between equity volatility and loan spreads are biased and inconsistent. We suggest instrumental variables that potentially identify consistent estimates. Our instrumental variable results indicate that there is no statistically significant difference in loan spreads paid by U.S. and European borrowers, and that OLS estimates of the association between idiosyncratic equity volatility and corporate loan spreads are biased downward by about a factor of 5.

Keywords: loan pricing puzzle, syndicated loans, idiosyncratic volatility

Note:

The views expressed in this paper are those of the authors alone and do not necessarily reflect those of the Office of the Comptroller of the Currency or the U.S. Department of the Treasury.

Reference

• EPFL-WORKING-169663

Record created on 2011-10-21, modified on 2017-05-12