Corporate bond default risk: A 150-year perspective

A reduced form model of default spreads with Markov-switching macroeconomic factors

“…This is in line with the recent study of Giesecke et al (2010), who show that, over the last 150 years, default risk represented about 50% of credit spreads. These authors also document that illiquidity of the bond market is probably the main factor that explains the difference between default spread and credit spread.…”

Creditor recovery: The macroeconomic dependence of industry equilibrium

“…A common assumption is to fix recovery based on historical averages, such as between 40% and 50% on debt issued by U.S. corporate borrowers and 25% on debt issued by sovereign borrowers (Das and Hanouna, 2009). For example, Giesecke et al (2011) apply a long-run average loss rate of 50% and devote their analysis to the determinants of corporate bond defaults over 150 years. They find that macroeconomic factors such as GDP growth, stock returns, and stock return volatility are strong predictors of default rates.…”

“…In this case, the coefficient on the interaction term of the stock crash with industry external finance dependence implies that the 75th-percentile sector has a 5.52-percentage-point lower recovery than the 25th-percentile sector when the market crashes. Similarly, the proxy for adverse equity market shocks applied in the model in column (5) is based on the upper 10 percentile of stock market return volatility, measured as in Giesecke et al (2011).…”

“…2 Defaults were clustered during 1982, the early 1990s, the early 2000s, and 2008-09-periods of low recovery rates. Indeed, Giesecke et al (2011) highlights the clustered nature of corporate bond default events at various times over the longer historical period they examine, including the railroad crisis of 1873-75, the banking panics of the late 1800s, and the Great Depression.…”

The Relationship between Risk-Neutral and Actual Default Probabilities: The Credit Risk Premium

“…In a more recent study (Giesecke et al 2011), US actual default rates and US bond yields based on a large data set covering 150 years with the goal to assess how the business cycle and other financial variables relate to the behaviour of observed default rates. In this article, the authors also compare actual credit losses with market credit spreads and conclude that credit spreads are twice as large as the actual credit losses.…”