Risk Aversion and the Yield of Corporate Debt
This paper develops a model to estimate the implied default probability of corporate bonds. The model explicitly considers the risk averse behavior of investors to provide a more precise framework for estimating the implied default probability. A Kalman filter method is used to estimate time-varying risk premium associated with the investor's risk aversion. The results of nonlinear regressions indicate that previous risk-neutrality models consistently overestimate the implied default rates of corporate bonds. The results also suggest that investors may have been adequately compensated for investment in risky bonds.
Journal of Banking and Finance
WU, Chunchi and Yu, C..
Risk Aversion and the Yield of Corporate Debt. (1996). Journal of Banking and Finance. 20, (2), 267-281. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/801