Determinants of credit spreads: The role of ambiguity and information uncertainty

This paper is a survey of the theoretical and empirical literature on the determinants of credit spreads. In particular I discuss whether some observations on credit spreads can be related to information risk and ambiguity about the probabilistic structure of the process driving the fundamental value of credit securities. Corporate bond yield spreads are a compensation for the various sources of risk such as default, liquidity, taxes and systematic factors. Empirical studies show that corporate bond yield spreads are still larger than can be explained by these known determinants of credit spreads. I intertwine the literature on information risk premia and ambiguity premia and argue that some observations can possibly be related to such risks.