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  4. On the Relation Between the Credit Spread Puzzle and the Equity Premium Puzzle
 
research article

On the Relation Between the Credit Spread Puzzle and the Equity Premium Puzzle

Chen, L.
•
Collin-Dufresne, P.  
•
Goldstein, R. S.
2009
Review of Financial Studies

Structural models of default calibrated to historical default rates, recovery rates, and Sharpe ratios typically generate Baa-Aaa credit spreads that are significantly below historical values. However, this "credit spread puzzle" can be resolved if one accounts for the fact that default rates and Sharpe ratios strongly covary; both are high during recessions and low during booms. As a specific example, we investigate credit spread implications of the Campbell and Cochrane (1999) pricing kernel calibrated to equity returns and aggregate consumption data. Identifying the historical surplus consumption ratio from aggregate consumption data, we find that the implied level and time variation of spreads match historical levels well.

  • Details
  • Metrics
Type
research article
DOI
10.1093/rfs/hhn078
Author(s)
Chen, L.
Collin-Dufresne, P.  
Goldstein, R. S.
Date Issued

2009

Published in
Review of Financial Studies
Volume

22

Issue

9

Start page

3367

End page

3409

Subjects

OPTIMAL CAPITAL STRUCTURE

•

CORPORATE YIELD SPREADS

•

TERM STRUCTURE

•

MACROECONOMIC CONDITIONS

•

EMPIRICAL-ANALYSIS

•

ENDOGENOUS BANKRUPTCY

•

EXPECTED RETURNS

•

STRUCTURE CHOICE

•

MONETARY-POLICY

•

INTEREST-RATES

•

OPTIMAL CAPITAL STRUCTURE

•

CORPORATE YIELD SPREADS

•

TERM STRUCTURE

•

MACROECONOMIC CONDITIONS

•

EMPIRICAL-ANALYSIS

•

ENDOGENOUS BANKRUPTCY

•

EXPECTED RETURNS

•

STRUCTURE CHOICE

•

MONETARY-POLICY

•

INTEREST-RATES

Editorial or Peer reviewed

REVIEWED

Written at

OTHER

EPFL units
SFI-PCD  
Available on Infoscience
August 7, 2013
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/93985
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