Title

Risk Aversion and the Yield of Corporate Debt

Publication Type

Journal Article

Publication Date

1996

Abstract

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.

Discipline

Business

Research Areas

Finance

Publication

Journal of Banking and Finance

Volume

20

Issue

2

First Page

267

Last Page

281

ISSN

0378-4266

Identifier

10.1016/0378-4266(94)00099-9

Publisher

Elsevier