Take Action

Home | Faculty & Research Overview | Research

Research Details

Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle, The Review of Financial Studies

Abstract

We develop a structural credit model to examine how interactions between default and liquidity affect corporate bond pricing. The model features debt rollover and bond-price-dependent holding costs. Over the business cycle and in the cross-section, the model matches average default rates and credit spreads in the data, and captures variations in bid-ask and bond-CDS spreads. A structural decomposition reveals that default-liquidity interactions can account for 10%–24% of the level of credit spreads and 16%–46% of the changes in spreads over the business cycle. Further, liquidity-related corporate bond financing costs amount to 6% of the total issuance amount from 1996 to 2015.

Type

Article

Author(s)

Hui Chen, R. Cui, Konstantin Milbradt

Date Published

2018

Citations

Chen, Hui, R. Cui, and Konstantin Milbradt. 2018. Quantifying Liquidity and Default Risks of Corporate Bonds over the Business Cycle. The Review of Financial Studies. 31(3): 852-897.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more

Take Action