How much of the corporate-treasury yield spread is due to credit risk?

No consensus has yet emerged from the existing credit risk literature on how muchof the observed corporate-Treasury yield spreads can be explained by credit risk. In thispaper, we propose a new calibration approach based on historical default data and showthat one can indeed obtain consistent estimate of the credit spread across many differenteconomic considerations within the structural framework of credit risk valuation. We findthat credit risk accounts for only a small fraction of the observed corporate-Treasury yieldspreads for investment grade bonds of all maturities, with the fraction smaller for bondsof shorter maturities; and that it accounts for a much higher fraction of yield spreads forjunk bonds..(...)