We study default risk in an incomplete markets general equilibrium setting. We show some interesting properties of default and recovery rates in equilibrium, and derive CAPM-type equilibrium bounds on credit spreads. We are able to price aggregate components of credit risk, summarized in our...

The question of predictability of credit spreads is of more than just academic interest. The ability to generate unerring spread forecasts is of considerable practical relevance for both treasurers of companies, who want to finance themselves through bonds, and institutional investors, who must...

This paper develops and estimates a monetary DSGE model with adverse selection in credit markets. The model features a new shock, referred as a lemons shock, which changes the riskiness of debtors in the mean-preserving spread sense with each debtor's riskiness unknown to a creditor. The...

This study investigates the dynamic response of credit spread (CS) to S&P 500 dividend yield (DY) shock. Based on the analysis of monthly data from 1919M1 to 2013M8, the VAR results show that credit spread significantly rises immediately following shock to the S&P 500 dividend yield. The results...

This study investigates how credit spread dynamically responds to the change in aggregate Tobin's q ratio. The VAR results from analyzing quarterly data from 1951 Q4 to 2012 Q4 reveal that credit spread drops significantly following the shock to the change in aggregate Tobin's q ratio. There is...

A new concept of credit spread for defaultable bond pricing is introduced in this paper. When combined with the corresponding survival-based pricing model, it allows fixed income portfolio consists of bonds and credit default swaps to be managed consistently in terms of default and credit spread...