Abstract
New evidence is reported on the empirical success of structural models in explaining changes in corporate credit risk. A parsimonious set of common factors and company-level fundamentals, inspired by structural models, was found to explain more than 54 percent (67 percent) of the variation in credit-spread changes for medium-grade (low-grade) bonds. No dominant latent factor was present in the unexplained variation. Although this set of factors had lower explanatory power among high-grade bonds, it did capture most of the systematic variation in credit-spread changes in that category. It also subsumed the explanatory power of the Fama and French factors among all grade classes.
| Original language | American English |
|---|---|
| Pages (from-to) | 90-105 |
| Number of pages | 16 |
| Journal | Financial Analysts Journal |
| Volume | 63 |
| Issue number | 2 |
| DOIs | |
| State | Published - Mar 2007 |
| Externally published | Yes |