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Default Spread and Credit Spread: Empirical Evidence from Structural Model

Default Spread and Credit Spread: Empirical Evidence from Structural Model,Tarek Chebbi

Default Spread and Credit Spread: Empirical Evidence from Structural Model  
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One important question in the literature on credit risk is "How much of the credit spread is explained by default risk?". In recent literature the yield spread is regarded as a measure of a comprehensive risk premium to compensate investors for a number of risks associated with corporate bonds. Using a first passage model in which the default occurs when corporate asset values hits a predefined default barrier, I conclude that the credit spreads observed in Tunisian market are highly explained by default risk. Notice that residual spreads are sensible to dynamics of default barrier, depending to the drift and the volatility of firm's assets values, and rating.
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