This paper proposes a risk-based explanation of the negative relation between credit spreads and expected equity returns found in the data. In a model where issuing equity is costly and debt has a tax advantage, firms optimally choose a lower net leverage if their cash flows are more correlated...

This paper is concerned with the valuation and analysis of risky debt instruments with arbitrary interest and principal payments subject to default risk. We use a discrete risk-neutral present value model with expected payments for risk-neutral investors and risk-free spot rates for the...

We examine the impact of earnings management uncertainty (EMU) on bond yield spreads in China. In the process, we decompose the bond yield spread into liquidity and default yield spreads. The findings suggest that EMU primarily drives the default yield spread of a corporate bond and that its...

This paper implements a novel model-free methodology to measure skewness risk premia in individual stocks. The methodology takes the form of a trading strategy, a skewness swap. The return on the strategy shows a significant positive skewness risk premium in individual stocks. The risk premium...

During the global financial crisis, stressed market conditions led to skyrocketing corporate bond spreads that could not be explained by conventional modeling approaches. This paper builds on this observation and sheds light on time-variations in the relationship between systematic risk factors...

We examine how regulatory uncertainty impacts the credit spreads of covered bonds issued by U.S. domiciled banks. Using data on covered bonds issued by Washington Mutual and Bank of America, for the September 2006 to December 2016 period, we find that investors require an incremental spread that...

We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high...

In this paper, we explore the relation between information uncertainty and S&P 500 index option returns. Since underlying state variable affecting economy is unobservable, investors have to obtain their own estimations based on available information. During such procedure, it is inevitable that...

We propose a method to extract individual firms' risk-neutral return distributions by combining options and credit default swaps (CDS). Options provide information about the central part of the distribution, and CDS anchor the left tail. Jointly, options and CDS span the intermediate part of the...

Equilibrium asset-pricing models with time-varying expected economic growth have been criticized for their apparent inability to generate an upward-sloping yield curve and downward-sloping term structures of equity risk and risk premium. We theoretically investigate the model-implied equilibrium...